When you’re plunking down a big bundle of cash for a house, you need to protect it from all that could go wrong—and that means you’d better buy home insurance. Pronto. Without it, your biggest investment could fall prey to floods, theft, and all other sorts of natural disasters. That explains why most mortgage lenders require borrowers to purchase home insurance; they want their investment safe and sound, too!
Unfortunately, there are some big misconceptions about home insurance. Here are six common myths, plus a reality check on each so you know what to do.
Myth No. 1: Home insurance is a rip-off
While home insurance costs vary by state—as well as factors like the square footage of the house, building costs in the area, and the location’s likelihood of damage from natural disasters—the average annual premium runs about $952 nationwide. But when broken down, that’s only an extra $79 that you need to add to your monthly housing budget (i.e., mortgage premium, property taxes, and interest).
Also, “considering the financial protection that you’re getting, it’s well worth the cost,” says Jeanne Salvatore, chief communications officer at the Insurance Information Institute.
For example, let’s say the average home insurance claim was $9,779 in 2014, with the average fire damage claim clocking in at a whopping $39,791. Many consumers don’t have anywhere close to that kind of cash lying around. (Indeed, 69% of Americans have less than $1,000 in savings, a recent survey by GOBankingRates.com found.) So if you’re in that group, experiencing a loss without home insurance could force you to rack up massive credit card debt in order to repair your house.
Myth No. 2: All of a home’s belongings are covered
Like car or health insurance, home insurance has limitations.
“A homeowners insurance policy is not designed to cover everything,” says Salvatore. “Each policy clearly states what’s covered and what’s not.”
While most standard home insurance policies cover damage caused by a natural disaster such as a fire, hurricane, or snowstorm, some types of personal belongings aren’t covered under basic insurance.
“If you have valuable art or fine jewelry inside your house, you might need a scheduled personal property policy to cover those items,” says Laurie Pellouchoud, a vice president at Allstate.
Myth No. 3: All injuries within a home are covered
If a visitor gets hurt at your house or on your property, your home insurance policy’s liability coverage will typically kick in to cover any claim that’s filed. But that’s not the case if you or a family member gets injured in your own home. If you slip in the kitchen or fall down the stairs, for instance, “your health insurance is what protects you from injuries, not your homeowners insurance,” Pellouchoud says. Got that?
Myth No. 4: I should base my coverage on the market value of my house
More than half (52%) of home buyers mistakenly think they should buy insurance coverage based on their home’s market value, a recent survey by Insure.com found. But for most home insurance policies, rates are based on the cost to rebuild the home—not the value of the house. In fact, “in most cases you need less coverage than the market value of your house,” says Salvatore.
Myth No. 5: My home business is covered under home insurance
Sadly, 61% of home-based businesses in America lack adequate business insurance, according to the Independent Insurance Agents & Brokers of America. That high percentage might be a reflection of confusion among home-business owners, because many people assume that they’re covered by their home insurance. However, “business liability and business equipment is not covered by homeowners insurance,” says Salvatore. Therefore, if you run a home-based business you’ll want to purchase a separate insurance policy for the company.
The good news is purchasing business insurance is easy. In most cases you can simply attach a business rider to your existing home insurance policy for about $100 a year, which will provide about $2,000 to $3,000 of additional coverage.
Consumers with poorer credit may be paying much more than others
Most financially literate consumers know how important it is to have a good credit score. This three-digit rating lets lenders know how likely you are to stick to your financial commitments and make timely payments; basically, it’s a way for them to measure risk. But did you know that it also has a large bearing on the rates you pay for home insurance?
In a recent insuranceQuotes study, researchers found that policyholders with only fair credit paid an average of 36% more on their home insurance than those who had excellent credit. And, depending on where you live, those figures could change drastically.
“Many consumers aren’t even aware that, in most states, credit plays a significant role in determining how much they pay for home insurance,” said insuranceQuotes senior insurance analyst Laura Adams.
Home insurance premiums by state
When we use the term “drastically,” that isn’t just an idle buzzword. The study found that a drop in credit from excellent to poor could have home insurance premium implications ranging from 0.2% to 288.1%.
The researchers say that the following states have the greatest home insurance premium increases when credit scores drop from excellent to poor:
- South Dakota – 288.1%
- Arizona – 268.6%
- Oklahoma – 248.0%
- Nevada – 235.3%
- Oregon – 234.9%
You can contrast that list with the states that have the smallest increases when credit scores drop from excellent to poor. While North Carolina is far and away the most forgiving of the states, consumers living in the other four won’t feel the financial pain nearly as much as their counterparts in South Dakota.
- North Carolina – 0.2%
- Florida – 25.7%
- New York – 29.3%
- Wyoming – 43.1%
- Hawaii – 53.1%
Note that California, Massachusetts, and Maryland are excluded from the list because it is prohibited in these states to set home insurance rates based on credit.
Differences by insurance companies
To make matters more confusing, the researchers say that different insurance companies also use credit score data in different ways. So, a consumer who is covered under one carrier may have their credit score reflect on them much more heavily than another consumer under a different carrier.
The bottom line, the researchers say, is that consumers should do everything they can to build and maintain their credit score.
“My advice to consumers is do everything you can to build and maintain excellent credit so you pay less for credit accounts and home and auto insurance. To maintain good credit make payments on time, keep balances low, and avoid opening many new accounts,” said Adams.