What is Home Insurance?
Home insurance is essentially a contract between the homeowner and the insuring company, which consists of a premium paid, details of the insured property, and a certain amount of financial backing in the case of loss by the insurance company itself. While some differences can occur from one policy to another, there are some basics that are similar for almost all insurance policies available in the market today.
Structural Coverage - The main part of the policy is that it pays for repairs to a home that has been damaged or destroyed by hail, fire, lightning, hurricane, or other disasters that are listed in the policy. However, it should be noted that floods are often not covered, nor will earthquakes or routine wear and tear be. In many cases, your outbuildings will also be covered, and this includes the garage, shed, or any other type of other structure on the property.
Liability Protection - Liability protection will cover against lawsuits for bodily injury or property damage that the policyholder or family members caused to other individuals. It also can pay for damage caused by pets, and even goes as far as paying the cost of defending the policyholder in court and any money awarded, up to the limit stated in the policy. Coverage is not just in the home, but it also extends to anywhere in the world, with a liability limit generally starting at $100,000. There are other add-ons that you can attach to the policy as well, such as higher liability limits, so make sure to check for this if it is required.
Personal Belongings - Personal belongings are also covered if they are stolen or destroyed by fire, hurricane, or any other insured disaster. Most companies will provide coverage for anywhere between 50% and 70% of the amount of insurance on the structural part of the policy. This can include furniture, clothes, sports equipment, electronics, and many other items. This also includes an off premises coverage clause typically, meaning that these belongings are covered anywhere in the world, unless you have decided not to include off premises coverage in your policy. There are dollar limits typically on more expensive items such as jewelry, so to ensure these items are insured to their full value, the policyholder can purchase a special personal property endorsement.
Additional Living Experiences - There are other experiences that will be covered by insurance policies, such as needing to live away from the house if it has been made inhabitable due to damage or disaster. It will cover hotel bills, meals, and other expenses incurred while the home is being rebuilt. However, the amount and way in which these expenses are covered can vary greatly from company to company.
Different Levels of Coverage Available
While this is a pretty wide area of discussion, there are essentially three major levels of insurance for your home. This will include the following:
Actual Cash Value - This policy type will pay to replace the home and the possessions minus any type of deduction for depreciation. For example, if you have a fire and your car gets destroyed inside the garage, it will pay you the blue book value of the car according to condition and age.
Replacement Costs - A policy with this level of coverage, will pay the cost of rebuilding or repairing the home, as well as replacing any possessions without deduction for depreciation. In the above scenario, the car would be replaced with a new one.
Guaranteed Replacement Cost - This is the highest-level protection that you can get on your home insurance. It pays whatever cost is required to rebuild your home as it was before the fire or other disaster, even if it is beyond the limit of the policy. This gives you protection against sudden increases in construction costs, due to inflation, or some type of supply chain issue.
Extended Replacement Cost - While not as common, some insurance companies will offer extended replacement costs policies, which will pay a certain percentage over the limit to rebuild a home. Normally, it is somewhere between 20% and 25% more than the limit of the policy.
The Take Away
Having the right insurance policy for your home can protect you from significant financial losses. That being said, most people who still owe on their mortgage have no option but to carry some type of home insurance. However, it would be foolish not to have this protection anyway. Like most insurance policies, take the time to shop around and to find the best available rate for your personal needs.