As a first-time homebuyer, the list of additional fees and transactional expenses at the closing table can be surprising. Homeowners insurance is perhaps the most important (and expensive) additional payment you’ll encounter at closing.
NerdWallet reports that home insurance costs an average of $1,631 per year. This may seem like a hefty sum, but it’s well worth it to protect your important investment. In fact, most lenders require borrowers to purchase homeowners insurance before closing and depending on where you live, some lenders may require the purchase of additional coverage in addition to a basic homeowners policy.
Standard Homeowners Insurance Includes Four Essential Types of Coverage
- The Structure of Your Home
Your homeowner's policy will pay to rebuild or repair your home if the damage is the result of a disaster listed in your policy. Many policies also cover detached structures like a garage or shed.
Generally speaking, you should purchase enough insurance to cover the cost of rebuilding your home. All of these structures should be taken into consideration when deciding on the amount of coverage you’ll need.
“The current market price of your home may not accurately reflect the cost to rebuild your home,” notes Coleen Karpf of the Zimmerman Group. “While your insurer will provide you with their recommendations for coverage, you’ll also want to understand how the cost of construction and building materials in your area might increase the total cost to rebuild.”
- Your Personal Belongings
A standard policy will also cover the cost to replace your personal items that are stolen or destroyed by an insured disaster. Personal belongings can include clothes, furniture, jewelry, and art, among other items.
“The best way to make sure you’ve got enough coverage for your personal belongings is to conduct a home inventory,” said Zimmerman Group agent Megan Ryan. “This can be an overwhelming task but it’s very important. To make it less stressful we recommend completing the home inventory one room at a time.”
Check out our step-by-step instructions for Home Insurance Inventory.
- Liability Protection
The liability portion of your homeowners insurance policy protects you against lawsuits resulting from injury on your property or damage caused by your pets at someone else’s home.
Additionally, your policy will provide no-fault medical coverage which means if your friend or family member is injured while at your home they can’t just submit their medical bills to your insurance company and their expenses will be paid.
- Potential Additional Living Expenses
Additional living expenses (ALE) cover the costs of hotel bills, restaurant meals, and other expenses that are the result of having to live away from home due to an insured disaster.
Your policy may include a time or spending limit in this area. Your insurance agent can provide you with these details.
What’s Not Covered by Standard Homeowners Insurance
Most standard homeowners insurance policies do not cover flooding. However, homes located in high-risk flood areas with mortgages from government-backed lenders like Fannie Mae or Freddie Mac are required to have flood insurance.
It’s important to note that “just one inch of floodwater can cause up to $25,000 in damage,” according to the Federal Emergency Management Agency (FEMA). There is typically a 30-day waiting period before your flood insurance goes into effect. So if you live in a flood-prone area don’t wait to buy flood insurance in addition to your standard policy.
While earthquakes can occur anywhere, the high cost of earthquake insurance makes buying a policy outside of high-risk areas cost-prohibitive. If you do decide to add earthquake insurance to your standard homeowner's policy it will cover the cost to repair or rebuild your home (possibly even with earthquake-proof upgrades), your personal property, and ALE.
- General Wear and Tear or Negligence
Homeowners insurance will not cause damage due to general wear and tear or negligence or neglect on the part of the homeowner. Things like termite damage that was not preexisting, water damage, worn carpeting, and mold are not covered by a standard policy.
Making timely repairs and consistently maintaining your home's exterior and mechanical systems is the best way to avoid paying for costly repairs down the line.
You can use the Zimmerman Group’s Ultimate Homeowners Checklist to help you stay up to date on home repairs.
With your homeowner's insurance purchased you’re one step closer to closing on your home. Learn What to Expect During a Home Inspection in next month’s blog.