Today, we’re discussing how to be prepared for what might happen. If you’re brand new to home ownership or just considering dipping your toe in the water, you’re aware that things can (and do) go wrong. While we hope that this doesn’t happen to you, acts of God are out of your control. Hail, robbery, flood; the list is long!
As a new homeowner, you are a target of marketing for countless products and policies advertised to protect you. What is the difference between home insurance and a home warranty? What’s the best way to protect against the unknown?
What Is Home Insurance?
Home insurance covers you in the event of an accident or a disaster. It fixes the damage to your house, to your yard, to other structures and your personal property inside of the house. It really protects you against things that are absolutely out of your control and/or going to be a big out of pocket expense. Most common things that we see here are hail and flood.
Other examples beyond mother nature would be burglary. Home burglary insurance will help you out in that arena. Also, if you have a guest over at your house and they trip on the stairs, they get injured, and they now have medical bills - It could help out in that situation too, since it happened on your property, in your house.
A ton of companies offer home insurance policies, larger ones like State Farm and Allstate as well as local companies. You have the freedom to shop around on home insurance and it is required if you have a mortgage. Your lender requires you to have home insurance, because they want to protect their investment in lending you the money to actually buy that house.
Cost Breakdown
For your insurance policy, you pay an annual fee and it's likely that if you have an escrow set up, it feels like it's monthly to you, but it's actually paid once a year. If you need to make a claim, you just pay the minimum deductible and then your insurance policy helps cover the rest of the expenses. You can shop every single year for the best coverage for you and then you need to have money set away for that deductible as well in the case that an event happens. Luckily, instead of having to set aside $20,000 for a new roof, it might only be $1,000- $5,000. It can really help you in terms of cash flow, budgeting, and protecting you from having to spend a ton out of pocket unexpectedly.
Claims Process
Let's use the roof issue as an example, because that is definitely one of the most common scenarios that we see in north Texas. We're going to walk you step by step through how that claims process would actually work.
Damage Occurs -
The shingles are there to protect and shed water away from your house. As the shingles deteriorate, they are less and less likely able to do that job. A leak occurs so the homeowners then call the insurance company they chose and now hold a policy with. They file a claim and say, “Hey, we had hail damage. I need somebody to come out and take a look at my roof and see if insurance would cover the cost of a new roof.”
Adjuster Assessment -
They then have what's called an adjuster come out. The adjuster works for the insurance company, they assess the damage to see if it's a valid claim and if it's something that the insurance company should cover. If they say the claim is approved, you would pay your deductible and they would complete the roof work and basically cover any of the cost above what your deductible was.
The Deductible -
What we most commonly see with roof deductibles is a range from 1% to 4%, and that's a percentage of the value of your policy. So if you have a $400,000 home, a 1% policy means you're going to pay $4,000 deductible to have your roof replaced entirely. If you have a 4%t deductible, your deductible is going to cost $16,000 on that $400,000 home, which is a very large and substantial difference. You do have to pay something, but paying $4,000 for a brand new roof is well worth the investment.
Just to reiterate, home insurance is required if you have a mortgage. If you do not maintain home insurance, your lender is going to put a policy in place for you and you are not going to like it because it's going to be expensive. They have a luxury taste in home insurance, because they're not paying for it.
Home Insurance Shopping Musts!
We're going to give you some tips on important things to look for when shopping; We advise buyers a lot on this as they are looking for homes and assessing what insurance policies they need.
#1 Be aware if you are in an area where you're going to require or would want special insurance. For example, in California you can add on a policy in case of an earthquake. Sometimes lenders will require you to have such things, some of them they will not. You just have to assess your risk tolerance, your financial situation, and whether that's worth paying for those kinds of policies for you and for your specific home.
#2 We want you to not only look at how much this policy cost, but also the deductible. Oftentimes the least expensive policy has the largest deductible. We are advising that you pay special attention to the deductible in the event that you need to replace your roof, because chances are fairly high that you will need to use that and pay that deductible. Compare that along with what is how much the policy costs? What's the actual annual payment? A cheap policy might look really attractive in the short term, but if they don't actually pay for what they need to do in the long term, it may be a lot more expensive for you.
#3 We want to know who will actually pay out in the event of an issue and I would say that the best way to figure this out is just word of mouth. Who do you know that has a policy with a certain company, ask them their experience or look up reviews! Chances are that your local community has plenty of insurance brokers who help you shop those policies. They can kind of compare everything side by side. We have a great one we're always happy to connect you with, so you don't have to do all of that individual searching yourself!
#4 You want to understand what the claims process is like and really who you can communicate with when you have an issue. There are a lot of companies, especially recently, that are going online only - they don't even have service representatives. The claims process is completely online and you are at the mercy of how they move that process along. There's no one whose office you can walk into and say “what's the status” or a phone number you can call and ask the questions that you need to. Be aware of those cheaper options where it's all online, you don't have an actual agent that's there to represent you, Whereas, a good agent will tell you whether a claim is even worth filing because it may not be in your best interest to file a claim for something. We see a ton of value in having an actual local agent that can just give you more guidance.
#5 When you're comparing to make sure that you have enough personal property coverage, you can include things like your wedding ring or some expensive piece that you have in your home. You don't have to have your homeowner's policy and your car policy through the same company, but you can and oftentimes there's opportunities to bundle those together and save a little bit of money.
The World of Home Warranties
We're going to talk about home warranty now in detail. Which, in contrast, is an optional policy that protects your budget more than it really protects your home. It covers the major systems and appliances from normal wear and tear, but it really protects you from big expenses all at once. Home warranty is typically a one year at a time policy and you can continue to keep it on, but it's one year at a time so you could shop it each year as you do your home insurance.
It's a policy that protects the major systems and appliances in your home. An average policy is going to cost you $500 hundred bucks a year, depending on kind of what you include. How you use a home warranty is, if you had a leak under your sink, you can call to tell them the issue, they're going to come out to fix it, and what you pay for is the service call. Your dishwasher goes out or your refrigerator goes out, if those are covered and they come out and service those items.
It’s common that this is part of a real estate transaction here in Texas, where the seller would pay for a home warranty of the buyer's choosing up to a certain amount. You have complete freedom to choose and if you want to buy a more expensive policy, you just pay the difference from what was written in the contract to the policy that you chose. It's a one year policy and the thought behind this is that it helps so that you don't have some large, unexpected expense right after closing. This will protect you.
Warranty Woes
Here’s the deal, home warranties have a really bad reputation for actually paying out. It really matters when you're shopping what policy that you choose and which company you choose. We are partial to more local home warranties where there are people that we can physically get a hold of. We completely can see the value of a home warranty, especially the first year that you own a home if you don't have good savings and an emergency fund. For every homeowner we recommend that you have an emergency fund or an unplanned expenses fund, because there are going to be things that go wrong that you just don't foresee. It's good to have $5,000 in a little savings account so you have a buffer. A home warranty can really help with your budget in that as you attempt to build up that emergency fund that first year, all you have to pay is your service call.
In conclusion:
We really hope that you walk away from this article with greater clarity on what function insurance serves and how a home warranty could supplement that while one is generally required, the other can assist if you don't have emergency savings or just don't want an unexpected expense right after closing.
If you guys have any further questions, please shoot us a note in the Where We Live Facebook group. We love to connect with you all over there so come join us! If you're a current homeowner and want to know more about how to keep your home in the best shape it can be signed up for our monthly home maintenance checklist at WhereWeLivepodcast.com.
Brianna & Keelie