Insuring your home

Homeowners insurance can be an especially confusing part of the home buying process. Here’s an overview of the process, the types of insurance involved, and how to make sure your home is adequately protected.

Making sure you purchase the right insurance to protect your home investment may seem as complicated as it is vital. Here is a quick rundown of what types of insurance there are out there, what levels of coverage they include and the factors influencing how much you pay.

Types of Insurance

When it comes to protecting your home all insurance is created equal, but not every home needs the same type of insurance coverage. Here is what may be required, and what is almost always optional:

Required Coverage

  • Hazard Insurance is what is usually referred to as homeowners insurance. It is required by the lender in the amount of the mortgage to protect you and the lender against hazards such as fire or storms. This insurance may be more or less comprehensive in how it protects the home, as will be discussed later.
  • Flood or Special Hazard Insurance may be required by the lender if your new home is in a flood zone or other special hazard area. However, floods can happen anywhere and are typically not included in standard hazard insurance, so buyers often choose to buy a flood policy even if their home is not particularly susceptible to flooding.
  • Mortgage Insurance is required by the lender if your down payment is less than 20 percent of the price of the home, and protects the lender in case of foreclosure. You will typically pay a mortgage insurance fee at closing, then a monthly fee as part of your payment until you’ve paid off 22 percent of the loan. If your loan is an FHA loan you will pay mortgage insurance for the life of the loan.
  • Title Insurance is required to protect the lender against any problems that may arise with the title to the property. An owner’s policy is also recommended to protect your equity in the property.

Optional Coverage

  • Mortgage Life Insurance can be purchased to pay off your mortgage in the event of your death, allowing your family to continue to live in the house without your income contributing to mortgage payments. Lenders will send you information and even recommend this type of insurance, but it is never required.
  • Home Warranty Policies will cover the cost of repair bills if the heating, plumbing, air conditioning or appliances break down during the first year of living in the home. It is never required, but a buyer may request that it be included by the seller as a condition of the purchase contract.

Levels of Coverage

Homeowners Insurance – the primary part of your insurance coverage – actually combines property protection and liability protection into one policy. How comprehensive each component is depends on the individual policy you choose.

  • Property Protection covers your home, other structures or possessions if they are damaged or destroyed due to perils.
    • Protection is broken down into four categories: (A) The dwelling itself, (B) Detached Structures, (C) Contents of the home, and (D) Additional living expenses. The amount of coverage stated in a policy is generally the coverage for (A), with the remaining coverage categories stated as percentages of (A).
    • The specific perils covered will differ based on the policy you purchase and will be specifically laid out in the policy itself.
    • Many policies will offer what is known as Actual Cash Value in replacing your property, which is the replacement cost less depreciation. Full replacement cost coverage is available, but often requires a higher level of insurance coverage to be purchased.
    • Liability Protection is paid out to third parties if you or any relative or dependent person living in the home is legally liable for an act that harms a third party, provided it is not excluded (i.e. criminal, intentional or business activities). This protection also includes medical payment coverage to cover medical costs, regardless of liability.

Factors in Cost

Your insurance premium may be affected by factors outside of your control. These include the levels of loss in your geographic area, the type of construction, size of the house, contents of the house, your credit score and the proximity and quality of fire and police protection in your area. The good news is that there are also several things you can do to influence the price you pay. These include the type of coverage, the deductible you pay per loss, optional coverage add-ons and potential discounts for installation of safety equipment and other risk reduction measures. Michigan State University Extension housing counselor Rob Weber suggests that, “You should remember to shop around and compare quotes from multiple different insurance companies to find the coverage that’s best for you.”

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