Let’s talk a little about home insurance.
I know—it’s a bit of a boring subject, but it’s absolutely a topic you need to be familiar with if you own, or ever want to own, a house.
Before you even buy a home, make sure you have three to six months of expenses saved in an emergency fund. If you have that covered, then you are definitely ready to hop in the market.
Home insurance is a requirement for most any mortgage, so let’s talk about a few of the basics.
What is home insurance?
Home insurance will cover you if you lose your home, or if your home gets damaged. It’s also there as liability coverage if someone gets hurt in your home or in your yard.
God forbid your house catches on fire or a tree falls on the roof, but if it happens, home insurance has got your back. That’s why it’s an absolute necessity. There’s no way you’d want to cover those expenses out of pocket.
How much coverage do you need?
This is so important. I want you to look for guaranteed replacement cost when you’re talking with your insurance agent. Many companies don’t offer this anymore, so shop around. The deal with guaranteed replacement cost is that your home will be covered no matter how much its value increases.
Many companies have put a dollar amount on the policy. So if you have a $100,000 home, they’ll cover that and maybe an additional 25%. But let’s say you’re in a hot market and, after five years, the value of your house increases to $175,000. Well, the insurance policy only covers you for $125,000, so you’ve got to find $50,000 somewhere else if you want your home back.
Guaranteed replacement cost will cover the full value of your home regardless of the value increase. Make sense?
What about deductibles?
A deductible is the amount of money you have to pay out of pocket before the insurance company will pay anything on the claim. Your deductible can be high or low, depending on how much you have stashed away to cover emergencies. That’s one of the main reasons you need three to six months of expenses saved in an emergency fund. Your emergency fund frees you up to have a higher deductible—which will lower your premiums (annual cost of the policy)—because it can cover the “smaller” expenses that come your way.
So how do you decide if you should raise your deductible? Take a look at the risk involved. If you’re moving from a $250 deductible to a $1,000 one, that’s a $750 difference—all of which will come out of your pocket if something happens to your home.
By raising the deductible, you lower your premium. If you save $30 a year, then it will take you 25 years without a claim to break even. But if you save $250 a year, then you only need to go three years without a claim to break even. That’s an easy choice!
When it comes to deductibles and premiums, you just need to look at the big picture and do a little math to see what works best for your situation.
I want your home to be a dream, not a nightmare. With the right kind of insurance, you’ll make that dream home a reality!
Watch Episode 3 of The Rachel Cruze Show to learn how to save BIG with insurance and discover when it’s the best time to buy or sell a home.