When you buy a homeowners policy, you actually receive much more than protection for your home.


Duane Duggan, Realtor and Author RE/MAX of Boulder

When you buy a home, you need insurance protection for what is probably the largest investment you will ever make. But when you buy a homeowners policy, you actually receive much more than protection for your home. Most homeowners insurance policies will not only cover the value of your home but also the personal property inside that home and provide liability coverage for you as a homeowner. Armed with a few pieces of information you will have a much easier time of shopping for homeowners insurance and understanding what it is that you are buying.

How much insurance do you need?
There is only one correct amount of coverage for your home: the cost to replace your home if it was to be completely destroyed. Keep in mind that the purchase price and your loan amount are irrelevant in determining the replacement cost of your home. So how do you estimate your replacement cost? You can get help determining that number from a number of different sources. One good source of information is an appraisal. A complete appraisal will detail your home’s replacement cost, and you will find a line item called “total estimated cost new” that will give you the number for replacement cost. Another source of information is your insurance agent. An insurance agent is not a home appraiser but should have access to helpful software and tools to determine the replacement cost of your home. With accurate information about your new home and a little experience, a good insurance agent should be able to insure your home correctly. A third source of information may be your builder if it is a newer home. The builder should have firsthand knowledge of the building costs.

My lender says I must have enough coverage to cover my loan amount.

Your mortgage lender’s main concern is to protect the loan they have given you. For that reason their request to you will typically be to find insurance in the amount of your loan. This can be a dilemma. In Colorado, and especially in the Boulder County area, land values can be exceptionally high. In this area, it is possible to have a loan value much greater than the replacement cost of the home. An insurance company will only pay the cost to replace the home even though you might have paid a premium for a higher level of protection.

How do I satisfy my lender’s insurance requirements?
Get a complete appraisal. A lender will typically allow you to insure your home for the appraised replacement cost even if it is less than the loan amount. A good insurance agent can help you with this. An experienced agent will help you find and read the replacement cost information presented on an appraisal. He or she will also be able to communicate effectively with your lender in providing insurance coverage information that satisfy both their needs to get you through your home closing.

Guaranteed Replacement Cost? Increased Replacement Cost?
Please be aware of the terms “Guaranteed Replacement Cost” and “Increased Replacement Cost”. Many insurance companies used to offer policies with guaranteed replacement cost coverage that guaranteed enough coverage to rebuild your home no matter how much coverage you purchased. Most companies now offer increased replacement cost instead. Increased replacement cost is a great safety feature in a homeowners contract. It states that the insurance company will pay a percentage more than the coverage listed on the policy. A good insurance agent should be able to help you establish a replacement cost amount for your new home that will fall comfortably within the policy’s percentage range.

How much will insurance cost?
The cost of insurance will vary greatly depending on the value of your home, location, and the level of personal property coverage. Premiums can vary between companies so comparison shopping is usually a good idea.

What deductible should I choose?
Your choice of deductible will be decided by your financial situation and your personality. The higher the deductible, the lower the premium. If it’s difficult for you to come up with a $1,000 or $2,500 deductible for a claim, you may want to pay a slightly higher monthly premium to have a lower $500 deductible. If you can afford a higher deductible and don’t mind taking care of small claims yourself (i.e., a broken window or wind-damaged fence), you can save money on your premium. Assess your situation, note the difference in premium for various deductibles, and make an educated decision that you are comfortable with.

Special coverages
Most of the time when you think of homeowners insurance, fire insurance usually comes to mind. Yet east of the mountains in Colorado we experience wind, hail, and floods. Due to large losses in the last decade due to these perils, insurance companies have changed how they determine coverage. Homeowners insurance might also cover many things you wouldn’t think of. Be sure to review your insurance coverage with your insurance professional to make sure it offers the protection you need.

What if I am buying a condo or townhome?
Your insurance needs may be different when you buy a condo or townhome than when purchasing a single-family home. Most often these units are covered by an association insurance policy that covers all the units in the complex. The cost of insurance is passed onto you in your association dues. When closing on a condo or townhome, your lender will need the name of the insurance company that insures that association. You can then purchase a homeowners insurance policy to cover your personal property and your liability. Not every condo association has insurance to cover your condo unit. There are a few associations in Boulder that do not have dwelling insurance coverage. Please check with the association to make sure. If the association does not cover the buildings, talk with your insurance agent and they will be able to help you customize a policy that will include coverage for your portion of the building. Even if your association has a policy to cover your unit, that policy may not cover such things as upgrades to cabinets and carpeting. Your association bylaws should detail the insurance coverage. It would be a good idea to get a copy of the bylaws and review them with your insurance agent. You can add to your own policy to cover gaps in your association policy.

When should I contact an insurance agent?
Your lender will need time to request Evidence of Hazard Insurance in order to obtain final approval on your home loan. If you do not currently have an insurance agent, you may want to start your search as soon as you find a home you plan on purchasing. Once you have decided on an insurance agent, it is important that you provide their name and contact information to your mortgage lender as soon as possible.

By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.