Odds are that your home is the single most valuable investment that you own and the largest line item on your monthly budget. So, it only makes sense that you’d want to make sure it’s protected. What’s surprising is that many homeowners never think twice about their homeowner’s insurance policy, let alone read and understand it. They know how much it costs each year but probably couldn’t tell you what’s covered and the limits. BUT, knowing what is covered and what’s not can make all the difference when disaster strikes.
What does Homeowner’s Insurance do?
Standard home insurance coverage provides reasonable protection for the average homeowner. It customarily covers damage up to your policy limits to structures and personal property caused by a variety of occurrences: fire, lightning, wind, hail, smoke, theft, sleet, snow, ice, vandalism, freezing of plumbing or other household systems, etc. Most policies are pretty extensive in what they cover, but there are typically some exclusions, and you should talk to your insurance agent and review what they are. For example, most standard policies don’t include flood damage.
Your policy also covers personal liability. This means that if you, a household member, or your property injures someone, your insurance will cover the damages up to your policy limits.
How does Homeowner’s Insurance work?
When you purchase a homeowner’s insurance policy, you are essentially buying a safety net for your home. If you suffer damages or losses to your home, it can add up quickly costing thousands of dollars to repair or replace. If you didn’t have insurance, you would need to pay for all these expenses out of pocket. With insurance, you would file a claim with your carrier, they will assess the damage, and then help you pay to get your home repaired or rebuilt.
Keep in mind that the amount you will receive from the insurance company is determined by the policy limits that you chose. Every policy has limits for structures and belongings. So, if your policy says you are only covered for up to $5,000 in personal belongings, but you have $10,000 worth, then you will have to cover the additional amount yourself. Therefore, it’s important to select limits that are as realistic in value to your property and personal belongings as possible.
You will also have to pay a deductible before your insurance will cover any damage. It’s similar to how your auto insurance works. You can choose a higher or lower deductible based on what you think you can afford and how it will affect your monthly premium.
What is Actual Cash Value, Guaranteed Replacement Value, Extended Replacement Cost, and Replacement Value?
These are the four different coverage options.
1. Actual Cash Value: This policy pays to replace the home or possessions minus a deduction for depreciation. So, if your kitchen cabinets are from 2000, you’ll get the cost of the cabinets minus the many years’ worth of use. It’s the value of what those cabinets are worth today.
2. Replacement Cost: This coverage pays for the cost to repair or replace your home or possessions without any depreciation. It covers the cost to replace the item at today’s cost.
3. Guaranteed Replacement Cost: This is the most robust coverage and your premium will also be the highest with this option. A guaranteed replacement cost policy pays whatever it costs to rebuild the home as it was before it was damaged even if it exceeds the policy limit. However, if you need to upgrade your home to comply with new building codes, it typically will not cover those additional costs.
- Extended Replacement Cost: Rather than a guaranteed replacement cost policy, some insurance companies offer an extended replacement cost policy. This type of policy pays a certain percentage over the limits to repair or replace your home.
Do I need Homeowner’s Insurance?
If you finance your home, then yes, you will be required to maintain adequate coverage on the property. If you own your home outright, you aren’t required by law to have insurance, but if any damage happens to your property, you will be solely responsible for paying for any repairs.
How much does insurance cost?
Your premium is determined based on the type of coverage you select, the policy limits, any additional coverages you choose, and the size, value, and location of your home along with a few other factors.
How do I pay for insurance?
If you are financing your home, some lenders will give the option as to whether you can pay for the insurance out of pocket or have the cost of the policy added to your monthly mortgage payment as part of your escrow.
When you start the home buying process it’s important to have an idea of how much insurance will cost you as well. Since the costs can range depending on the type of coverage and your limits, it can be tempting to choose a policy based on price alone, but you probably won’t get the right amount of protection using that method. Protecting your investment doesn’t mean breaking the bank and you’ll be glad you have proper coverage in the event of an emergency. If you are new to the home buying process and have questions on how it works, give us a call!
Vice President, Senior Mortgage Lender
NMLS MLO ID: 532621