Home Insurance 101 - What You Need to Know Before You Buy
Mortgage companies in Canada require you to buy home insurance to cover, (at a minimum), the balance of your mortgage should your home need to be replaced or repaired due to fire or other damage. But all insurance policies are not created equal. Here's what you need to know to help you find the right home insurance for you and your family.
If you're a first time home buyer, the prospect of choosing a home insurance policy can be a little daunting. How do you know what needs to be covered? Which type of policy is the right one for you? How much coverage do you need? How much will it cost?
Here are some of the basic things you'll need to know to choose the right home insurance policy.
What is Home Insurance?
Home insurance is an insurance policy that you purchase to cover the cost of replacing your home and its contents in the case of a fire, damage or theft (in the case of your belongings). It also covers your liability for anything that occurs on your property, such as if a neighbour were injured or their belongings damaged while they're in your home.
There are different kinds of home insurance policies, comprehensive, basic, broad and no frills.
A comprehensive home insurance policy covers your home for all risks; other than those which insurance policies do not normally cover, such as natural disasters.
Basic home insurance (also called 'named perils insurance') only covers the specific perils that are set out in the policy. This is a cheaper option since it doesn't cover as many possible hazards as a comprehensive policy.
Broad home insurance is a hybrid of comprehensive insurance and basic insurance policies. For example, you may have comprehensive insurance on the property itself, while having only basic insurance on your belongings.
Finally there is no frills coverage for buildings which are otherwise uninsurable due to structural problems, but this isn't likely something you'll want for your home. It's used for properties which require extensive repairs before they can be used as a dwelling.
How much coverage do I need?
The general recommendation is to buy enough insurance to cover 100% of the replacement cost of your home. This is the total cost of rebuilding your home, not necessarily the purchase price, or the current market value and doesn't include the cost of the land. If you're in doubt, getting an estimate of the replacement cost of your home from a building contractor or professional appraiser can help set your mind at ease.
Taking an inventory of your personal possessions and the contents of your home will help you to make sure that you are completely covered and reimbursed if you have to file a claim for damages or theft. If you have rare or unusually expensive personal belongings such as electronic equipment or other valuables, you should make sure that your policy covers these items as well.
Finally, liability coverage is important to protect you in case something happens on your property that would cause you to be financially responsible, such as if someone were injured on your property or some of their belongings were damaged - event accidentally.
How much will it cost?
The cost of your home insurance policy varies depending on the amount of coverage required, as well as the deductible you choose, the neighbourhood you live in and other factors.
A deductible is the amount which you are required to pay against the full cost of the damage or repairs. If the claim total is less than the deductible then you will end up paying the repairs yourself, and likely would not want to file a claim. For example, if your deductible is $500 and your home sustains $1,500 in damage due to an insured peril, you will be required to pay the first $500 and your insurance company would pay the final $1,000.
You can choose to raise or lower your deductible when you purchase your insurance policy. Generally, the higher deductible you choose, the lower your monthly premiums will be. However, if you do file a claim you will be on the hook for more of the cost.
As a general rule, an average home insurance policy can cost about $400 - 800 annually, but the cost will vary depending on your home, your insurance company and the factors mentioned above. Getting home insurance quotes online can help you to understand what sort of rate you should be expecting to pay.
Before you buy, it's important to shop around and ask your insurance representative if you have any questions or concerns. Don't be afraid to ask questions, protecting your home and possessions is important to your peace of mind and you want to be sure you're getting the policy that's right for you.