Acquiring home insurance is often an afterthought compared to other stages of buying a house. Regardless, shopping for such deserves time and attention to ensure homebuyers have enough coverage.

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Are you looking to purchase home insurance? If so, the article below examines how home insurance functions, provides a step-by-step buying guide, and a few tips for finding the best policy.

Home Insurance 101

Home insurance, also known as homeowners insurance (HOI), is often essential when purchasing a house. While no laws mandate this insurance, most mortgage lenders require it before agreeing to finance a home loan. 

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Following are the basics of understanding home insurance and why it’s wise to have such a policy to protect your most-prized asset.

What Is Homeowners Insurance?

A home insurance policy is a form of protection that covers an individual’s house and belongings. Should an unfortunate incident transpire, HOI would provide coverage for damage and losses sustained, along with liability against accidents to others on the property. Every homeowner’s policy is different, and each has a liability limit that establishes how much coverage there is to repair or replace the home. 

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Home insurance is a separate policy from mortgage insurance. Instead of providing coverage to the homeowner, private mortgage insurance (PMI) protects the lender if there is a default. Both policies can sometimes be required.

Who Needs Homeowners Insurance?

Those who own their residence without a mortgage are not required to have homeowners insurance. Alas, if a mortgage is necessary, then lenders will make it a condition for owners to have enough coverage to repair or rebuild their residences. This requirement is due to the associated risks of borrowing a significant amount of money, like a home loan.

When Does Homeowners Insurance Pay Off?

A typical home insurance policy covers the costs of damage and losses from occurrences like fire, hail, lightning, theft, and vandalism on the property. In such an event, this insurance includes protection for the home's interior and exterior, personal liability for damage or injury to others, and additional living expenses if necessary. Natural disasters like earthquakes, floods, hurricanes, and tornadoes may require separate protections based on location.

How Much Is Homeowners Insurance?

The cost of home insurance hinges on the property's age, location, and size. Examples of specific price factors include building codes, construction, crime rates, rebuilding expenses, and weather risks. With these aspects in mind, homeowners insurance premiums can range between $100 to $200 across all states.

Why Is Homeowners Insurance Important?

Homeowners insurance is essential when buying a house, not just because lenders require it. This insurance protects many folk's most prominent investment. In the unfortunate event that their home needs rebuilding or replacing, HOI will cover those expenses. If property damage or injuries happen to another person, the policy also covers liability for legal actions. The financial protection for a significant investment like one's home is perhaps the foremost type of insurance. 

Five Step Buying Guide for Home Insurance

Making a strategy and sticking to it is an excellent way of simplifying one's home insurance buying process. Follow these steps before purchasing an HOI policy to ensure the best coverage at the best price.

Step 1: Determine What Needs to be Covered

Homeowners insurance covers the building itself and the belongings inside, but it can protect even more. The first step in shopping for a suitable policy is to decide on what coverage to provide. The following are standard protections:

• Structure of the Home: Dwelling coverage is mandatory and based on the value of the building's construction. Most policies also cover detached property structures, such as a barn, garage, pool, or tool shed, at 10 percent of the home structure's insurance amount.
• Personal Belongings: Personal property coverage protects your clothes, furniture, jewelry, and other items if stolen or destroyed. Often, it is about 50 to 75 percent of the insurance on the house's structure.
• Liability Protection: This coverage protects homeowners against lawsuits for property damage or injury that occurred on their property. A policy's liability pays the court costs up to the policy limit, which starts at about $100,000.‍
• Medical Expenses: HOI also provides medical coverage if someone gets injured. The homeowner can prevent a liability claim by submitting the medical bills to the insurance company.‍
• Additional Living Expenses (ALE): If you get displaced due to damage, ALE pays the costs of living away from home. It can cover hotels, rental homes, groceries, and other expenses while the insurance company resolves the claim.‍
• Supplemental Coverage: A standard policy may not cover damage from an earthquake, flood, or landslide, depending on the home's location. Insurance companies offer add-ons such as coverage for sewer backup, identity theft, and more.

Step 2: Decide on the Coverage Amount

Three home insurance policies designate how much the insurer pays. Replacement cost coverage, the industry standard, covers the cost of repairing or rebuilding based on the current market. Actual cash value coverage, the least expensive policy, pays the home's original value minus depreciation. Extended replacement cost coverage for an increased premium allows a claimant's payout value to surpass the policy limit.  

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When considering what method to use, homeowners must determine how much coverage they require. Below are a few ways to estimate insurance needs.

Calculate the Cost to Rebuild the Home

Obtaining enough coverage to protect your home in the most extreme situations is essential. To assess how much it would cost to execute a complete rebuild, multiply the square footage of your home by your area's building costs per square foot. Insurance and real estate agents can provide your location's up-to-date and accurate building costs.

Calculate the Cost to Replace the Belongings

Other than estimating how much it costs to rebuild your house, factor in replacement expenses for items inside. Note what it costs to replace each item today, not what you paid. Consider inflation and other aspects that cause replacement costs to change. Create an inventory of your belongings to ensure everything gets accounted for.

Step 3: Gather and Compare Multiple Policy Quotes

Once you know what coverage you want and how much you need, it’s time to shop around. The best way to do that is to amass numerous quotes from insurers offering equal coverage. Comparing insurance policies has never been easier, thanks to the transition of companies offering online quotes. 

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Check that all coverages, endorsements, and exclusions offered by the compared insurers are the same. Add-on coverages can impact each company's rates, so comparing quotes can assure homeowners find the best deal.

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There is more to an HOI policy than its price. The cheapest coverage does not always equate to the most satisfactory experience. Other aspects to consider when comparing insurance companies are their claims history, customer service, financial stability, and types of coverage. Ask questions and mediate your concerns with each company to make your decision easier.

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Step 4: Choose a Home Insurance Company and Customize a Policy

After comparing quotes, it's time to select an insurance provider and modify a policy to meet your requirements. Double check the company's record is in good standing and that their insurance license is up to date. Next, ask your mortgage loan officer if the coverage satisfies the lender's insurance conditions.

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Some modifications are necessary, such as adding a flood insurance rider if located in a high-risk flood zone. Other endorsements are preferential, like identity theft protection. There is a range of HOI endorsements to consider when customizing one's policy. Among the most popular recommendations are:

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• Appliance breakdowns
• Earthquakes
• Flooding
• Home businesses
• Identity theft
• Personal injury
• Personal property replacement
• Scheduled personal property
• Service lines
• Water backup

Step 5: Finalize the Policy

You’ve planned for the proper amount of coverage, compared quotes, chosen an insurance company, and customized a policy. Thus, all that is left is finalizing the details. Before activating the coverage, applicants must pass a home inspection, arrange payment plan options, and set policy dates. 

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Begin by determining the policy’s deductible; the sum paid out-of-pocket on each claim before the insurance pays out. A lower deductible results in higher premiums, while a higher deductible delivers lower premiums. 

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Next, decide on how to pay the premiums. Standard practice is to pay the first year’s premiums with the mortgage closing costs and then include them with an escrow account. 

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Last, set the policy period, the dates on which the HOI coverage begins and ends. 

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All that remains is for the insurance company to approve it and then for you to sign on the dotted line. Paying the initial premium will activate the policy. After closing, they will send the homeowner insurance declaration page detailing the coverages.

More Tips When Shopping for Home Insurance

Everybody's insurance needs differ; hence, so are the policies. Nevertheless, try these additional suggestions to find the best HOI policy possible.

• Find Ways to Lower Your Premium: Lowering the rate can be simple, depending on your requirements. Homeowners can reduce their premiums by bundling separate insurance policies, increasing the deductible, making home renovations, and filing claims with care.
• Seek Discounts: Many companies provide excellent deals with first-time home buyer rebates, multi-policy reductions (bundling policies), new customer bonuses, and further savings for homes with security systems, sprinkler systems, smoke detectors, or hurricane shutters.
• Re-Examine Your Policy Each Year: Shop for homeowners insurance to ensure you always get the best coverage. Even while some companies provide loyalty discounts, there are situations when a new provider can offer better savings.

Finding the Best Homeowners Insurance Policy

Are you looking into buying a house and need a homeowners insurance policy? Contact a representative at Wesley Mortgage for advice, concerns, or questions about your home insurance needs.

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