Homeowner's Insurance for the Buyer

One of the lender’s conditions for loaning you money is that you buy a homeowner’s insurance policy, also called hazard insurance. You must bring proof to closing that you have insurance in effect and that it’s paid for 12 months, or your loan won’t close.

What is proof? Your policy declarations page, which shows the time your insurance went into effect, the policy period, and the cost for 12 months. So bring either your whole policy or just the declarations page to closing. In addition, you’ll need a receipt or letter from the insurance company to prove you’ve paid the bill.

It's Just Protection

The reason the lender requires insurance is to protect his interest if catastrophe strikes. For example, if your home is destroyed by fire, he knows the mortgage will be repaid from the insurance proceeds.

But even if you didn’t have a lender, you should insure your home. It’s a major investment that contains all your worldly possessions. Just imagine what it would cost to replace them.

You also need to protect yourself against lawsuits if someone is injured or worse on your property. Let’s say you hire a neighbor kid to help you clean debris from the roof after a windstorm and he falls off and breaks an arm and ankle. If his parents are the type to file a lawsuit, perhaps claiming his future athletic career just ended, you could find yourself needing an attorney and fighting for your very house and retirement savings.

Where It Is

So how do you find the insurance to protect yourself and all you own? Many companies offer homeowner’s insurance. You will need to research and follow through on it prior to closing your home purchase.

*Ask family, friends, and co-workers for insurance company references. Also ask what their experience has been. We’ve all heard stories about someone making a claim against a policy only to find their rates shooting up or the policy cancelled

*Contact your state insurance office, which may have helpful consumer materials including information on consumer complaints.

*Explore online sources of information describing ways to save on your homeowner’s policy. Discounts are given for many reasons, including having smoke and burglar alarms and having more than one policy with the same company — auto insurance, for example.

* Know what insurance you need. The experts agree on these basics:

1) Your best bet is guaranteed replacement cost coverage, not an actual cash value replacement policy. An actual cash value policy would pay only what your house and contents were worth on the day disaster struck. But to build a new house and replace the contents will cost a lot more than the used property was worth.

2) Ask about and understand the personal property protection offered. You may be able to get a personal property replacement guarantee as part of your basic policy. If not, ask if the company offers that feature as an add-on, called a rider. Again, the value of your used possessions is less than the cost of replacing them.

3) The amount of liability coverage you need depends on your personal worth and circumstances. The more you’re worth, which is to say the deeper your pockets, the more you have to lose if you’re sued. Some experts say you need coverage equal to double your assets. There are excess-liability policies available for those who need the protection.

4) Some possessions may need to be insured on separate riders. Say, for example, that you inherited a collection of antique tea cups that appraise at $50,000. They need a separate rider.

5) Standard homeowner policies do not insure against floods, earthquakes, hurricanes, or wildfires, among other things. If your house is in a flood plain, your lender will require flood insurance. Otherwise, specific hazard insurance is up to you and will require riders separate from your basic policy.

Buyer's Tip: You need to do research and buy homeowner’s insurance far enough in advance that it is in effect by closing day and you have proof in hand.