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.
Myth No. 6: Flood coverage is included in standard policies
Think flood coverage comes with your standard insurance policy? Typically, it doesn’t. So if you live in an area prone to flooding (i.e., a flood zone), you should definitely make sure to buy a separate policy in case flooding occurs. In fact, homes in flood-prone areas are often required to have separate flood insurance. Flood insurance is available from the federal government’s National Flood Insurance Program as well as some private insurers.
And in case you think you’re safe and don’t need flood insurance because you’re in a dry area, know this: “Floods can happen anywhere,” says Pellouchoud. Hence, she recommends that homeowners who live outside flood zones (particularly if they’re close to one) should still consider purchasing flood insurance. The average policy is about $700 a year; you can look up price quotes for your area on FEMA’s Flood Map Service Center.