How do I decide on homeowners insurance for my first home?

Buying your first home is an exciting and stressful process. In the midst of getting a mortgage, a home inspection and what-not, you’ll also have to get homeowners insurance. Homeowners insurance is coverage that protects your home (and investment) in the case of damage from fires, natural disasters or other unforeseen events.

While homeowners insurance isn’t legally required to own a home, in Massachusetts, if you are financing your home purchase with a mortgage – like the other 70% of Americans – your lender will likely require you to obtain homeowners insurance coverage.

What is (and isn’t) covered with a typical homeowners insurance policy?

Before deciding what you need for coverage, it’s important to know the four categories of what’s usually covered with a homeowners policy:

• Possessions & Personal Belongings – AKA all your STUFF. This aspect of coverage will protect the belongings in your home in the case that they are damaged or destroyed when your home is damaged.
• Structure – Protection for the physical structure of your home for covered events like fires, lightning or vandalism. Usually included in this is also the internal infrastructure of the home like electrical wiring, heating systems, air conditioning, and plumbing.
• Personal Liability – Protects you from lawsuits or medical expenses if someone where to get injured on your property. This coverage extends to you, your household members and even pets.
• Additional Living Expenses – Helps cover the expenses incurred during the time you aren’t able to live at your home. For example, if repairs to your home cause you to seek temporary housing at a hotel, this coverage can help you pay for that cost, plus transportation and other incidentals like meals.

While there are exceptions and different more specialized coverage available, these four areas are what is typically covered with a standard homeowners policy. Now, if you’re wondering what isn’t typically covered…

• Damage from floods, earthquakes or general poor home maintenance
• Dog bites from “dangerous” breeds
• Any claims from a tenant(s)
• Sewer Backup
• Damage or loss of jewelry/collector’s items
• Claims related to a home business

Keep all these factors in mind when deciding on a policy. They should be able to help you determine if you need any specialized coverage or additional riders.

How much coverage do I need?

When deciding on your levels of coverage, you’ll need to think about your individual situation. For structural coverage, you’ll need an accurate estimate of the costs to rebuild your home. You can get a rebuild estimate by finding out the per square foot construction costs in your area, and then multiplying that cost by the size of your home. Other factors like trim, materials, and design affect the cost of rebuilding, so be sure to consider these as well. You can also hire an independent appraiser to find the value of your home. Once you know the estimated rebuild cost, it is recommended to purchase coverage of that amount.

When it comes to purchasing coverage for your possessions, you’ll need to know the difference between replacement cost and “actual cash value.” Replacement cost refers to the amount it costs to replace an item after it is lost or destroyed. Actual cash value (ACV) refers to the current value of a possession or piece of property. Possessions that you’ve had for a while may have depreciated, and ACV takes this into account when paying out a claim. With ACV coverage on your possessions, you may not receive enough money to replace them in a claim scenario, only what they’re valued at by your insurer.

People often prefer replacement cost coverage to that of ACV, because replacement cost coverage lets you retain more value on your possessions.

When deciding on how much personal belongings coverage to purchase, keep these differences in mind. The types of possessions you have (or plan to have) and what you’d be able to afford if you had to repurchase your belongings are both important considerations. There are some types of possessions that won’t typically be covered by these policies. Items like rare coins, stamp collections, antiques, and firearms are not usually covered under a standard policy, however they can be covered by an insurance rider.

The amount of coverage you will have for additional living expenses is usually based on the amount of structure coverage. A standard homeowners policy allots 20% of your structural coverage for additional living expenses, meaning if the structure of your house is insured for $200,000, living expenses would provide $40,000. This is enough to get by in most situations, but you should still be aware of the rules surrounding this. When receiving an additional living expenses payout, you may have a time limit to spend it. Some companies give you 12 or 24 months to spend an ALE payout, so find out specifics before deciding on coverage.

It is typically recommended that your purchase at least $300,000 in liability coverage for your homeowners policy, as opposed to the standard $100,000 most companies provide. This is because lawsuits combined with medical bills can quickly blow through that initial $100,000. Be sure to research how much risk you have, and purchase liability coverage accordingly. For those looking for extra protection beyond what is included in your homeowners policy we would recommend a separate Umbrella Insurance policy. You can purchase a $1 million umbrella insurance policy for a couple hundred dollars a year.

Because homeowners insurance is broken into these four categories of coverage, it’s important to be aware of your individual tolerance for risk and the types of coverage offered within each category. Do your research before jumping into a policy!