When you buy a new home you need insurance protection for what is probably the biggest investment you will ever make. But when you buy a homeowners policy you will get much more than protection for your home. Most homeowners insurance policies will not only cover the value of your home but also your personal property inside that home and provide liability coverage for you as a home owner. Armed with a few pieces of information you will have a
much easier time of shopping for homeowners insurance and understanding what it is that you are buying.
How much Homeowners Insurance do you need?
There is only one correct amount of coverage for your home: the cost to replace your home if it were completely destroyed. Keep in mind that the purchase price and your loan amount are irrelevant in determining the replacement cost of your home. So how do you estimate your replacement cost? You can get help determining that number from a number of different sources. One good source of information is an appraisal. If you are going to have a mortgage on your home, your mortgage lender will probably require an appraisal. A complete appraisal will detail your home’s replacement cost and you will find a line item called “total estimated cost new” that will give you that number for replacement cost. Another source of information is your insurance agent. An insurance agent is not a home appraiser but should have good software tools to determine the replacement cost of your home. With accurate information about your new home and a little experience, a good insurance agent should be able to insure your home correctly. A third source of information may be your builder if it is a newer home. The builder would have first hand knowledge of the building costs.
My lender says I have to have enough coverage to cover my loan amount
Your lender’s main concern is to protect the loan they have given you. For that reason their request to you will typically be to find insurance in the amount of your loan. This can be a dilemma. In Colorado, and especially in the Boulder County area, land values can be exceptionally high. In this area it is possible to have a loan value much greater than the replacement cost of the home. Example: The purchase price of a home is $450,000, the home is 2,000 sq/ft and sits on a good lot with a view of the mountains. You put 20% down and have mortgage of $360,000. An average to good quality home may be able to be replaced for $125 per sq/ft or $250,000 in this case. If you buy insurance to cover a $360,000 mortgage you would be over-insuring your home by $110,000 and paying higher premiums than necessary. An insurance company will only pay the cost to replace the home. Neither you nor your lender would get $360,000 even though you paid the premium for that amount of coverage.
How do I satisfy my lender’s insurance requirements?
Get a complete appraisal rather that a “Desktop” appraisal. This may cost you an a little more but may be worth it. A lender will typically allow you to insure your home for the appraised replacement cost even if it is less than the loan amount. A good insurance agent can help you with this. An experienced agent will help you find and read the replacement cost information presented on an appraisal. He or she will also be able to communicate effectively with your lender in providing insurance coverage information that satisfy their needs to get you through your home closing.
Guaranteed Replacement Cost vs. Increased Replacement Cost
Please be aware of the terms Guaranteed Replacement Cost and Increased Replacement Cost on your Homeowners Insurance policy. Many insurance companies offer to offer policies with “guaranteed replacement cost” coverage that provides a guaranteed that coverage will be available to rebuild your home no matter how much coverage you purchased. Other companies offer “Increased Replacement Cost” instead. Increase Replacement cost homeowners contracts typically offer 20% to 50% additional coverage over the coverage listed on the policy. A policy with guaranteed replacement cost coverage may be preferable but if you have a good insurance agent to establish an accurate replacement cost amount for your new home a policy with increased replacement cost coverage can be a very good second choice.
How much will insurance cost?
The cost of insurance will vary greatly depending on the cost to replace your home and your individual insurance needs. With some basic information about your home, and any special insurance requirements you may have , your agent can
give you an estimate of the cost to insure your home.
What deductible should I choose?
Your choice of deductible will be decided by your financial situation and your personality. The higher the deductible, the lower the premium. If you would be a hardship to come up with a $1,000 or $2,500 deductible if you have a claim you may want to pay a slightly higher monthly premium to have a lower $500 deductible. If you can afford a higher deductible and won’t mind taking care of small claims yourself (ie. a broken window or wind damaged fence) you can save money on your premium. Assess your situation, note the difference in premium for various deductibles and make an educated decision that you are comfortable with.
What if I am buying a condo or town home?
Your insurance needs will be different when you buy a condo or townhome than when purchasing a single family home. Most often the association covers some part of the physical units in the complex. The cost of insurance is passed on to you in your association dues. When closing on a condo or town home, your lender will need the name of the insurance company that insures that association. In addition you need to purchase a homeowners insurance policy, generically known as an HO 6, to cover your personal property, your liability and any part on the physical unit not covered by the association. IMPORTANT! Not every Condominium or Townhome association is the same. The coverage provide by the Master Association Policy varies dramatically from one association to the next. Even if your association has a policy to cover your unit, that policy may not cover such things as upgrades to cabinets and carpeting. Please use an insurance agency that has expertise in reviewing association documents to help you coordinate the coverage afforded by the association and what you need to cover on your policy. Coverage for your condo or townhome can be very inexpensive but needs to be set up correctly.
- Ask your lender about ordering a complete home appraisal rather than a “desktop” appraisal. This may provide you with more detailed replacement cost information that will help you in selecting insurance coverage limits.
- Find an insurance company that can offer you a policy with Guaranteed Replacement Cost coverage but if done correctly a Increase Replacement Cost policy can meet your needs.
- Find an experienced insurance agent. A good insurance agent will:
- Help you through the process of buying homeowners insurance
- Help you understand information presented on a homeowners appraisal
- Be familiar with construction costs in your area and will have tools to help you determine the replacement cost of your new home even without the aid of a residential home appraisal.
- Be able to communicate effectively with your lender and be able to quickly provide proof of insurance coverage that will satisfy their requirements for closing.
- Be able to educate you on all other specific details of that company’s homeowners policy.
- Chose a deductible that fits your need. The higher the deductible you can be comfortable with, the more money you save.
- When shopping for an old home, a mountain home, or a very unusual home, it may be helpful to talk with an insurance agent during the buying process. They may be able to advise you of various issues that can make it more difficult to buy insurance or make insurance more expensive.
- Even though your personal property is covered automatically on most homeowners policies (typically 75% of your dwelling coverage), ask your insurance agent to explain any limitations and exclusions. Make your agent aware of any high value, unique and irreplaceable items you may have.
The Bolder Independent Personal and Business Insurance Option in Boulder County
Since 1989, we have been offering customers in Boulder County great options for their personal and business insurance. As an independent insurance advisor, we give our customers the ability to compare rates and policies from over a dozen insurance companies, so they can be sure to get the right coverage at the best rate. At Bolder Insurance, we represent our customers, not the companies, and are proud to be an active part of the Boulder County community.
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