Up until you buy your first home, your experience with insurance may be limited to auto, life and health coverage policies. When you buy your first home, you’ll encounter a slew of new types of coverage, including title insurance, homeowner’s insurance, flood insurance and maybe even something called an “umbrella policy.” To minimize the head-spinning, here’s a brief overview.
Title Insurance. During the sale of a home, a title insurance policy must be acquired. A title company will research official records to determine if any events “encumber” the clear title to ownership of the home. For example: If a contractor wasn’t fully paid for work done on the property, he or she may have filed a “mechanic’s lien” on the property, meaning that upon sale of the property, the contractor must be paid from the proceeds of the sale before title can transfer to the new owner. The records search also will reveal if the owner has taken out a home equity loan. You and the mortgage company have a financial stake in the home, so title insurance is an important protection against potential financial liability.
Homeowner’s Insurance. Before closing on a home, buyers need a homeowner’s insurance policy. Your mortgage company will require it, but even if you pay cash for the home you’ll want the protection. Homeowner’s insurance protects you in a number of ways. First, it protects your home from financial loss after storm damage and fire. It will pay for the cost of repairs and reconstruction and for your temporary housing. Second, it protects you from liability should someone get injured on your property, such as tripping and falling on your front steps, incurring medical bills. It protects your belongings from fire and theft by burglary. Policies can be complicated so have the insurance agent explain any unfamiliar terminology. Ask them for a concrete example of how the insurance works. For instance: Roof damage from a storm may have a deductible amount of 1 percent of the total insured value of the home. If the roof is a total loss and the home’s insured value is $300,000, that means your deductible — the amount you must pay out of pocket — is $3,000.
Also ask your agent about policies with built-in increases in the insured value to keep up with home value increases. When home values rise, the price of repairs rise as well.
Most major insurance companies will provide “bundle” rates or discounts if you purchase car and home insurance from the same company. You might also consider an “umbrella” policy which is an extra layer of liability insurance above your regular policy limits, up to $1 million or more, protecting you from large lawsuit awards if you were to be found at fault after a serious accident.
Flood Insurance. If the home is in an area that is considered at risk for flooding, the law requires that mortgage companies require flood insurance. Standard homeowner policies do not cover floods. Flood insurance is available separately through agents via the National Flood Insurance Program. If the home is not in a flood-prone area, you may not be required to purchase it, but some insurers advise it on the grounds that up to 25 percent of flood damage each year happens to homes not in designated flooding areas.
