When you buy your first home, you’ll likely need homeowners insurance if you take out a mortgage. Even if you don’t need home insurance, purchasing a policy is wise.
Home insurance provides financial protection if your home or personal property is damaged due to a covered incident, otherwise known as a peril. Home insurance also helps cover the cost of liability claims if someone is injured by or on your property, or if one of your household members damages someone else’s property.
Our guide to home insurance for first-time homebuyers will help you make an informed purchase to cover your new home.
Recommended coverage types for first-time buyers
In most cases, you’ll just need to purchase a standard homeowners insurance policy. This type of policy typically provides six types of coverage to protect you, your property, and your financial assets against certain risks.
Dwelling coverage
Dwelling coverage protects against losses involving the structure of your home, including the foundation, roof, walls, and windows. When your home is damaged or destroyed by a covered peril — such as a storm or a fire — dwelling coverage helps pay for repairs or reconstruction up to your policy limits, or the amount your insurer will pay out for an eligible claim.
Other structures coverage
Other structures coverage protects the structures on your property that are not connected to your primary residence. This may include detached garages, driveways, gazebos, greenhouses, and sheds.
Personal property coverage
Personal property coverage can pay to repair or replace your belongings after a covered incident. For instance, if your furniture was damaged in a fire, this part of your home insurance policy can help pay for a replacement. Coverage often extends to items outside your home, such as a computer stolen from your vehicle or luggage stolen from a hotel while you’re traveling.
Liability coverage
If someone is injured or their property is damaged at your home or by a member of your household, liability coverage can pay for their medical bills or the costs to repair or replace their property. If you’re sued over the incident, liability coverage can also help cover your legal expenses and any settlements.
Additional living expenses coverage
Additional living expenses (ALE) coverage pays for extra costs you incur when a covered event makes your home temporarily uninhabitable. Eligible expenses often include the cost of hotel stays, restaurant meals, or laundry services while your home is being repaired or rebuilt. If you lease out a portion of your residence, ALE may also cover lost rental income.
Additional living expenses coverage is often limited to a specific time frame, such as 12 months, or a particular dollar amount, as indicated in your policy.
Medical payments coverage
Medical payments coverage can help pay for medical bills when a guest is injured on your property, no matter who is at fault. This type of coverage has lower limits, such as $1,000 or $5,000, and is intended to resolve minor issues without needing to file a liability claim.
Recommended coverage levels for first-time buyers
Every coverage type has a limit — the maximum amount your insurer will pay out for a single claim. The amount of coverage you need depends on many factors, but you can use the following suggestions as a rule of thumb:
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Dwelling: 100% of your home’s replacement cost
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Other structures: 10% of your dwelling coverage
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Personal property: 50% of your dwelling coverage
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Liability: at least $300,000
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Additional living expenses: 20% to 30% of your dwelling coverage
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Medical payments: at least $5,000
The actual amount of coverage you need could vary. For example, you may want to increase your personal property coverage, or schedule coverage for expensive valuables like jewelry or collectibles. Or, if you have a guest cottage on your property, you may need to increase your “other structures” coverage limits.
Factors affecting home insurance costs for first-time buyers
The cost of home insurance depends on several factors, including information about you and your home.
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Home replacement cost. Your home’s value and the amount of money it would cost to replace it directly impact the amount of coverage you need and the cost of your policy.
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Age of the home. Newer homes tend to cost less to insure, while older homes are often more expensive to insure because they’re more likely to have outdated plumbing, electrical systems, and roofs, thus presenting a higher risk to the insurance company.
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Construction type. The materials used to construct your home affect your insurance rate. The more expensive the materials are to repair or replace, the more your home costs to insure.
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Location and geographical risks. Homes in higher-risk areas, such as areas prone to crime or storms, tend to cost more to insure. On the flip side, homes near a fire hydrant or fire department may see cheaper rates because of their protection class. Location also plays a role in the cost of labor and materials, which can further impact your rate.
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Safety features and home improvements. Certain security and safety features can lower the cost of insuring your home. For instance, many insurers offer discounts for hardening your home against certain risks, which can reduce your chances of filing a claim or mitigate the damage after a covered event.
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Credit-based insurance score. Similar to a credit score, your credit-based insurance score (CBI) is a numerical score that represents the risk you pose to an insurer. Your CBI is based on many of the same factors used to determine your credit score, including your payment history and outstanding debts. Not all states allow insurers to use your CBI when setting premiums.
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Claims history. Insurance companies may look at past claims filed by you or previous homeowners, then charge higher premiums for policyholders or properties prone to multiple claims.
How to choose the right home insurance policy
The right home insurance policy for you depends on your coverage needs, your budget, and, if you’re financing your home, your mortgage agreement. Here are a few tips for choosing the right policy.
Determine your coverage needs
Before you start getting quotes from insurance companies, you should understand your coverage needs by doing the following:
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Review your mortgage agreement to ensure you have the right type and amount of coverage. Requirements may include risk-based coverages, such as flood insurance if you live in a designated flood zone.
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Estimate your replacement cost, or the amount it would take to rebuild your home after a total loss. Insurers can typically provide this, but you can also estimate your replacement cost by multiplying your square footage by the building costs in your area.
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Conduct a home inventory to determine if the standard amount of personal property coverage — often 50% or 70% of your replacement cost — is enough to cover your personal items. As you perform a home inventory note and items you may merit additional coverages, such as wedding rings, collectibles, or art pieces.
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Analyze local or property risks to determine if you need additional coverages or endorsements for perils, or events, not typically covered by a standard policy. This may include sinkholes, earthquakes, water backups, or flooding.
Get home insurance quotes
Shopping around for home insurance will help you find a policy that meets your coverage needs and budget. You should get at least three insurance quotes before choosing a provider. This can help you determine the average cost of home insurance for your specific circumstances, including the composition and location of your home, your claims history, and your insurance-based credit score.
Always get quotes for the same type and amount of coverage for an accurate comparison. Each quote should also be for the same deductible amount, or the amount you’ll need to pay out of pocket after a covered loss. Common options include dollar amounts like $500, $1,000, and $1,500, or percentage amounts like 0.5% or 1% of your home’s total value.
Compare quotes and insurers
Once you receive quotes, you can compare rates, but don’t assume that’s the only factor to consider. Here are a few factors that can help you make an educated decision about which policy is best for you.
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Coverage details, such as if a policy includes actual cash value (ACV) or replacement cost coverage. A policy with ACV coverage will factor in depreciation when determining a claim payout. Replacement cost coverage will pay to repair or replace at today’s prices.
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The insurer’s financial stability, which reflects the likelihood that an insurer can pay out claims in the future. You can check insurer financial ratings through independent ratings companies like Demotech, Inc., AM Best, Standard & Poor’s, and Moody’s.
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Insurer reviews as provided by both industry experts and friends and family. You can also check consumer-driven reports on sites like TrustPilot.
Cost-saving strategies for first-time homebuyers
Most homeowners want to save on home insurance, but it may be even more important for a first-time buyer. These strategies can help.
Make home safety improvements
Buying a home with robust safety and security features — such as wind mitigation, home security alarms, and sprinkler systems — can help you save. If the home you’re buying doesn’t have these features, you can consider adding them, then asking for a policy review to see if you’re eligible for a lower rate.
Consider a higher deductible
A higher deductible will generally lower your premium. However, you’ll pay more out of pocket if you file a claim. When shopping for coverage, you can get quotes for different deductible amounts, such as $500 and $1,000, or 0.5% to 1% of your home’s total value, to see how each affects your premium.
Discounts
Many insurance providers offer additional discount opportunities, such as:
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Multipolicy discounts for bundling your home insurance with another type of insurance
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Loyalty discounts when you’re a customer with a history of timely payments
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Paperless discounts when you opt to handle everything online or over the phone
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Green discounts for energy-efficient homes that meet certain criteria
When shopping around, make sure to check for available discounts and savings opportunities to determine if you qualify for a reduced rate.