Buying your first home is such an exciting journey. From saving a down payment, to getting pre-approved, going to look at homes, to actually finalizing the purchase, there are so many factors to consider. It can be a little nerve-wracking, and one important aspect that often gets overlooked is home insurance. Whether you’ve just bought your first home, or you’re still in the beginning stages, we are here to answer your questions about first-time home buyer’s insurance.
Is Home Insurance Mandatory In Alberta?
Unlike auto insurance, which is mandatory for every driver in Canada, home insurance is optional. However, if you have a mortgage on your home, your lender will most likely require that you purchase mortgage and home insurance. But even if you are completely mortgage-free, it is always a good idea to purchase home insurance. Your home is likely the biggest investment that you will make in your life, and we believe that it is in your best interest to make sure that you are protected against potentially disastrous events.
What Is The Difference Between Mortgage Insurance And Home Insurance?
If you have less than a 20% down payment, you’ll need mortgage insurance. Mortgage insurance protects the lender in case, for whatever reason, you are not able to make the mortgage payment.
On the other hand, home insurance protects you and your family financially from loss and liability. This coverage protects you, your property, and your possessions in the event of a fire, flood, or other insured peril.
What Does Home Insurance Cover?
Basic coverage includes:
Outbuildings (any other buildings on your property)
Personal property (furniture, clothing, appliances, antiques, jewelry, etc.)
Liability (if someone gets injured on your property)
Additional living expenses (expenses incurred if you have to obtain alternate accommodation while your home is being repaired)
These are just some of the basic coverages included in a home insurance policy. You can also purchase additional coverages, like sewer back-up and overland water protection. You may also choose between named perils and all risk, as well as guaranteed replacement cost and actual cash value, which we will discuss further below.
What Is The Difference Between Named Perils And All Risk Home Insurance?
When you are shopping around for home insurance, you will likely be asked if you would rather have named perils or all risk insurance. But what exactly is the difference between these two coverages?
All risk home insurance provides coverage for every type of risk, unless it is specifically excluded. Basically, if it is not named on the list of exclusions, you can assume that you are insured for it. Your broker will be able to provide you with a list of risks that are not covered with this type of policy, and it usually includes things like sewer backup, damage caused by vermin, raccoons, or insects, and damage caused by the freezing of any plumbing or heating system, to name a few. However, you can purchase extra coverage for these with endorsements, also known as a coverage add-on. For example, you can purchase sewer backup coverage for as little as $50/year, depending on your location and the value of your house. All-risk tends to be more expensive than named perils, but it offers the most protection.
Named perils home insurance provides coverage for predetermined risks. Named perils has less exclusions than all risk, because you get a list of perils that are insured. This list typically includes perils such as fire, lightening, windstorm, hail, water damage, theft and vandalism. Like all risk insurance, you can choose to purchase extra coverage with endorsements.
Once you’ve decided which type of coverage you prefer, you’ll want to decide whether to insure to actual cash value or guaranteed replacement cost.
What Is The Difference Between Guaranteed Replacement Cost and Actual Cash Value?
Guaranteed replacement cost (GRC) means that your house and contents are insured to the total cost of replacing it with a new home and/or contents of similar quality.
Actual cash value (ACV) means that your house and contents are insured to the value of your home at the time of replacement, less depreciation.
For example, if all your bedroom furniture is destroyed by a small fire in your bedroom, under the ACV model, you would only receive payment for the cost of the furniture less depreciation. Depreciation is calculated by determining the lifespan of an item, and dividing the cost of the item by the number of years it should last. I.e, if the bedroom furniture cost $8,000 five years ago, and it was deemed to have a 15-year lifespan, your insurance company would only pay you $5,333 to replace the furniture, using the ACV value. If you opted for GRC coverage, your insurance company would pay to replace the furniture with a new set of similar kind and quality.
So What’s The Best Coverage Choice?
If you’re looking for cheap home insurance, named perils and actual cash value is the way to go. But keep in mind that this means you are not protected against as many perils, and if you do suffer a loss, you may not recover the full amount.
If you’re looking for the best home insurance, all risk and guaranteed replacement cost is the way to go. This means that you are insured against many perils, and you’ll be indemnified to the total value of the loss.
Remember, cheap insurance isn’t always the best choice. If the worst-case scenario happens, you don’t want to be kicking yourself wondering why you opted for the cheapest option. Especially when the better option only costs an additional $150-200 per year.
What Do I Need To Purchase Home Insurance?
So you’re ready to call or email your insurance broker, but what kind of information do they need to provide you with a quote?
Well, your purchase agreement will usually include the details necessary to provide you with an accurate quote, but if you don’t have that handy, here are some things that they will likely ask you about:
Location of the property
Building details (when it was built, information about the plumbing, electrical, and roof)