Homeowner's insurance basics

Protecting your investment is what homeowners insurance and other insurance policies are all about. Coverage varies widely as do costs. Take time to shop rates and terms. Being over-insured can be as costly as being under-insured is risky.

While most lenders will require you to take out homeowners, or hazard, insurance before they approve your loan, you should be thinking anyway about how to protect the home you've just purchased. Most buyers get a comprehensive homeowners insurance policy, which provides coverage for fire damage, water damage (not by flooding, which is covered by federal flood insurance), personal possessions, personal liability, vandalism, theft, and loss of use of the house.

The Cadillac of insurance policies is guaranteed replacement cost coverage, which will pay to rebuild your home even if the cost to rebuild exceeds your policy limit. This kind of coverage costs about from $400 too well in excess of $1,000 a year, depending on the area and the price of the home. But even if you can afford it, it is not available everywhere or for every property--older homes, for example. Some big insurance companies also have started limiting the amount they will pay on a claim to 120 percent of the policy's face value.

Straight replacement cost coverage, or cash value coverage, is a cheaper and more limited option (about 25 percent less per year than guaranteed replacement coverage). It will pay to rebuild your house if it's destroyed, but coverage is limited to the policy amount. Make certain you're insured for enough to rebuild.

Special coverage

In addition to regular homeowners insurance, you may require special coverage for such hazards as earthquakes and floods. While California is targeted for earthquake coverage, at least 16 other states are considered at risk for quakes: Arkansas, Colorado, Idaho, Illinois, Indiana, Kentucky, Massachusetts, Mississippi, Missouri, Nevada, New York, South Carolina, Tennessee, Utah, Washington and Wyoming. Earthquake coverage can be costly ($2 to $15 per every $1,000 of coverage), but you should consider it if you live near a fault or your home is more than 50 years old and/or built on a slope, landfill or flood plain.

If you live in flood-prone areas, you may need flood insurance, too, because water damage from dams and waterways is not included in standard homeowners policies. Available through the federal National Flood Insurance Program, an average policy runs about $300 a year.

Get ready for more questions

Insurance representatives must have certain information about you and the property before they can tell you if they will write a policy and how much it will cost. They'll want to know your Social Security number, the age and location of the home you want to buy, proximity of fire stations, and the age and condition of the plumbing and electrical systems. The insurance company will also want to make sure that you're a good risk. If you've previously filed claims, or you're frequently late paying your bills, you may be denied coverage.

Don't wait to shop

Many buyers put off buying insurance until the last minute. This can cost you in time and money. Start shopping for insurance as soon as you sign the purchase contract. Otherwise you could be caught short if the insurance carrier you have in mind refuses to insure your home Some insurance carriers, for example, won't insure homes that are built on slopes or have shake roofs or antiquated electrical systems.

Cut Your Insurance Costs

Get quotes from three insurance companies. Compare rates and ask about package plans that may be offered at reduced prices.
Increase the policy's deductible amount. The deductible is the amount you are expected to pay on a claim.
Ask about discounts for new homes or homes with a security system, deadbolt locks and smoke alarms.
Check with your car insurance carrier. Not only is this a good option if you're having trouble getting homeowners insurance, but the company may give you a discount for having both policies with them.

Estimate Your Rebuilding Cost

Some insurance agents estimate low on the cost to rebuild a home. This may save you on premiums, but it could leave you underinsured. Here is one formula for estimating the amount of replacement coverage you'll need:

Ask a local builder or knowledgeable real estate agent how much it costs per square foot to rebuild in your area. This figure can vary significantly from one location to the next.
Find out the approximate square footage of the home you're buying. Your appraisal will include the square footage.
Multiply the two figures. That's the approximate amount of insurance coverage you'll need.

Quick Take

Home buyers often get pitched on buying mortgage life insurance, which does one thing: Pay off the lender in the event of your death. This is not always advisable, especially if the interest rate on the loan is low and you have survivors who may need the mortgage for tax reasons. Instead, increase your regular life insurance coverage so that any proceeds after your death can be invested to provide enough money for your survivors to continue paying the loan.