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Michael Corbett's Blog

By Michael Corbett | Real Estate Pro in Los Angeles, CA

Insurance: What to Get—What Is Enough?

Virtually all lenders require that you purchase homeowner’s insurance. You’ll have to show “proof of insurance” prior to closing. Lenders want to know that you’re protecting their investment from harm, such as damage caused by fire, water, a tree falling through the roof, and even vandalism.

How much insurance is enough? Your lender will tell you what’s the bare minimum required for your particular home purchase, and then it’s up to you whether you want to buy extra coverage for the perils that won’t be covered under your basic policy. A basic policy will cover things like fire, theft, falling objects, damage from frozen pipes, and sudden and accidental damage from artificially generated current to electrical equipment.

If you’re buying a condo or co-op, there are special insurance policies just for you, sometimes referred to as “HO6” policies (as opposed to “HO2” policies for homeowners), and which meet the needs of owning a condo or co-op. This is because the property’s common areas, such as the hallways, the roof, a laundry room, etc., are covered separately. Most condo and co-op associations hold the building policies and you just have to get yourself the basic coverage you need to protect your own unit and meet the lender’s specific requirements.

How to Select the Right Policy
With the property information in hand—price, square footage, number of stories, year built, etc.—start calling around to insurance brokers or insurance companies that offer homeowner’s policies and get quotes. Obtain references from friends, your real estate agent, your mortgage broker, your escrow officer, or your lawyer. And don’t forget to talk to the insurance agent that carries your current car insurance. As far as coming up with the cash for it, be prepared that you’ll pay for an entire year’s worth of insurance up front when you close on your house. In subsequent years you’ll likely pay monthly or in installments throughout the year.

Make sure that your insurance covers the costs of replacing your home at the time of the problem—not the year you buy it. It’s called replacement cost coverage. In other words, if your kitchen goes up in smoke five years from now, replacement cost means your insurance policy will pay for what it costs to replace that kitchen in five years—not just in today’s dollars.

Additional Insurance—All about the Hazards
Depending upon where you live, you may have to purchase insurance to cover hazards unique to your area. These include insurance for floods, tornadoes, hurricanes, and earthquakes.

Talk to your long-term neighbors to find out what kinds of insurance they have in place. You will also want to ask them about the history of the neighborhood. Have there been any big local fires that have ever swept through, or any flooding or mudslides from the hills above?

Home Warranties
A home warranty is basically an insurance policy that covers the repair cost of the house’s major systems once you have purchased it. I love these and highly recommend that you get one.  You can ask the seller to pay for one year of this coverage. This is a wonderful way of getting some protection from the seller that ensures the systems, appliances, plumbing, and electrical wiring in the house are working and operational.

The policies have some restrictions, and you will have to review their coverage, but overall they are very cost-effective and practical. For example, they cover the cost of repair or replacement of your refrigerator if it breaks down during the coverage period, but it won’t cover the ice maker. It will, however, cover all the big stuff—roof, pipes, electrical, appliances, pool, and heating and air. Home warranties only cost about $600 on average for one year of coverage. And they more than pay for themselves the first time the dishwasher breaks down and needs to be replaced.

Additional Tip: Bundle Your Insurance

Have your insurance broker put your auto and homeowner’s policies with the same carrier. You can get a big discount for the double package!

Comments

By abenjam5,  Mon Jan 28 2013, 08:07
I am looking for auto insurance. I have visited the site http://www.advasureinsurance.com/, and it looks promising. I was just curious as to whether or not anyone has visited this site. I would appreciate any reviews.
By John Mack,  Thu Nov 21 2013, 17:51
Thanks for the great article! I'm still new to the whole housing prospect and it's great to get helpful information for my future home. When I'm looking for insurance in Calgary I'll have a better idea of what to look for and how. I think bundling it sounds like a great idea.

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