The Top 5 Mistakes in Buying Homeowner’s Insurance

And How to Avoid Them

The Top 5 Mistakes in Buying Homeowner’s Insurance
April 29, 2014

For many people, homeowner’s insurance is one of those things they reluctantly buy because their bank says they must. It adds around a hundred dollars or so a month, give or take, to the mortgage payment, and most people probably don’t think too much about it once they’ve bought it and the policy is in place.

By the same token, most people probably don’t think they’ll ever have to use their homeowner’s insurance. After all, earthquakes, fires, floods and tornados always happen to somebody else, don’t they?

Unfortunately, this kind of thinking often leads to big mistakes when it comes to buying homeowner’s insurance. Here are five errors that are commonly made in the purchase of such policies:

  1. Buying the cheapest policy available. There are lots of things in life where you get what you pay for, and homeowner’s insurance is definitely one of them. This usually is not a purchase where you want to cut corners or go with the cheapest option.

    In short, all insurance companies and homeowner’s policies are not the same — far from it. When shopping for coverage, look for highly rated insurance companies that have a history of financial stability and provide swift and professional claims handling. If you ever have to make a claim on your policy, you don’t want to have to deal with an insurer that is going to fight you tooth and nail on your claims.

  2. Not buying enough coverage. This goes hand in hand with the first mistake. According to a study conducted by consumer advocacy group United Policyholders, as many as two-thirds of all homes in the U.S. are underinsured. One reason why is because homeowners often try to save money by only buying enough insurance to cover their mortgage. This can be a costly mistake, as the mortgage amount may represent only 70-80 percent (or less) of a home’s value.

    Even insuring up to a home’s current market value might not be enough, as rebuilding the home to its previous condition can easily exceed this cost. To guard against this, buy a policy with extended replacement coverage, which will pay up to 125 percent of your coverage limit to rebuild your home. Or for maximum protection, buy a policy with guaranteed replacement coverage, which will pay an unlimited amount to rebuild your home and replace items that are damaged or destroyed by covered events.

  3. Assuming that coverage is included for flood, mold and sewage backup. In most instances, homeowner’s policies do not cover these events. This is especially true with flood insurance, as many victims of Hurricanes Sandy and Irene in the northeastern U.S. painfully discovered after it was too late.

    If your home is within a designated flood zone, your bank will probably require you to buy flood insurance. Even if it isn’t, you might want to seriously consider buying it, especially if you live near a lake, canal, river or (obviously) the ocean. Learn more about the National Flood Insurance Program at FloodSmart.gov. Meanwhile, sewage backup coverage is usually inexpensive — as little as $50 a year — though mold insurance can cost significantly more.

  4. Assuming your deductible is a flat amount. Standard homeowner’s insurance policies include a deductible, which is the amount you must pay yourself before coverage kicks in. You can save money on your premium by choosing a higher deductible.

    But keep in mind that in the event of a major weather catastrophe like a named hurricane or earthquake, the deductible could change from a flat amount to a percentage of your coverage. This percentage could be as high as 10-15 percent — which means if you have $200,000 in coverage, your deductible could skyrocket from $1,000 or so to $30,000. Be sure to read the fine print on your policy or ask your insurance agent about this potentially costly gotcha.

  5. Not maximizing discounts. There is a wide range of discounts you might be entitled to on your homeowner’s policy. These apply to such things as having a home built using safe building materials, using a monitored home security system and smoke alarms, having deadbolt locks on all exterior doors, and maintaining multiple insurance policies (like your automobile and personal umbrella policies) with the same carrier.

If you are buying a new home, pay careful attention to details like these that are involved in purchasing your homeowner’s insurance policy. Meanwhile, if you have lived in your home for many years, it might be smart to dig out your policy from the drawer where it’s been gathering dust – or review current coverage with your agent – and compare it against these criteria. If you are going to learn that your policy doesn’t cover what you thought it did, it’s much better to do so now than when disaster strikes.

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