Estimating The Cost Of Homeowner's Insurance

Estimating the Cost of Homeowners Insurance During the Buying Process

Many prospective homeowners fail to consider the total cost of owning a house during the buying process. Buying involves more than the closing price and settling on a monthly mortgage payment. You must also consider your monthly homeowners insurance premium, a cost you can estimate with a fair degree of accuracy long before you sign the purchase contract.

Understanding the Basics of Homeowners Policies

Standard policies cover such events as hail, lightning, fire, theft, winter freezing, and hurricane damage. They do not cover flooding from a hurricane, floods in general, and earthquake damage. When looking at a property, first assess if one policy will be adequate or if multiple insurance products will be required and seek your estimates accordingly.

Estimating the Cost to Cover the Structure

Take the square footage of the home and multiply it by local building rates per square foot, excluding the value of the land on which the house sits. For insurance purposes, you don't want to know what the house costs at sale, but rather what it would cost to rebuild. (Note that it's always best to look at policies with built-in annual cost adjustments to address future inflation, especially in the wake of a hurricane, tornado, or flood when construction costs tend to rise.)

Estimate the Cost to Cover the Contents

Standard policies insure 50% to 70% of the value of the home's contents. Even before you move into a new home, you should be able to compile an inventory of what you already own and what you will be acquiring once you move in. (This inventory should be kept updated at all times, with homeowners coverage adjusted for both acquisitions and divestments.)

Your belongings can be insured for "actual cash value," but a depreciated value will be subtracted from that amount when a benefit is paid. The alternative is to insure at "replacement cost," but note that such policies tend to be about 10% more expensive. Benefits on jewelry and artwork are generally capped at $1,000 to $2,000, but separate coverage or endorsements can be added to your coverage (at an additional cost) if necessary.

Estimate the Cost to Cover Liability

Liability clauses in homeowners policies pay benefits when someone other than a member of the family is injured or their property is damaged while on your property. The coverage extends to legal fees incurred in the event of a lawsuit and to damages awarded. The standard minimum coverage is $100,000, but experts recommend $300,000 to $500,000 especially if children will be present in the home and potentially dangerous property features are present, like a swimming pool.

Don't Forget Emergency Living Expenses

Homeowners coverage should always cover the cost of living away from the home during a period of repairs. Standard policies provide an amount equal to 20% of the coverage on the house for this expense. Always know the exact amount of the emergency living benefit and how long it will be paid out in the event of a claim.

Most insurance companies will be happy to give you a coverage estimate before your purchase a home. If you don't have all the necessary information, your Realtor should be able to obtain it. Make sure that any policy considered covers these key points in order to arrive at a reasonably accurate estimate of your monthly premiums to get a full-picture of the cost of owning the home.