Home Insurance
What Is Home Insurance? Home insurance, also known as homeowners insurance, provides financial protection for your home and other assets against disasters. Usually sold as a package policy, your homeowners insurance covers the structure and your personal property, as well as your personal legal responsibility (or liability) for injuries to others or their property.
Is Home Insurance Required? Although Homeowners insurance is not required by law, in most cases coverage is required by lenders in order to get a homeowner’s loan (prior to closing). If you still owe money on your home, your mortgage lender will also require you to have homeowner’s insurance. Some lenders actually collect the homeowners’ insurance premium as part of your monthly mortgage payment, place it in an escrow account, and pay the insurer on your behalf.
Why do you need home insurance
Even though it’s not legally required, home insurance is not only a good idea because it helps protect your home and other assets, it's also a crucial step in your journey to home ownership.
You may not be able to obtain a mortgage without proof of an home insurance policy. You could lose everything you own and pay out of pocket to rebuild, repair or replace your home and belongings if a fire, natural disaster, or other event were to strike your home. If your home is burglarized, the costs to replace your belongings can become a major challenge. Anything you own could be used as leverage in a lawsuit, including your home if someone gets injured on your property and sues you.
What does Homeowners Insurance Policy Cover?
Most home insurance policies help cover costs related to dwelling and personal property damage, additional living expenses, and certain types of natural disaster damage. Your homeowner's insurance policies may include provisions for:
Dwelling (for damages to your house) Personal Liability (coverage for injured on your property or by your pets on your property) Personal property (for damages to possessions) Loss of Use or additional living expenses (for times when your home is being repaired) Other structures (for damages to fences, garages, sheds, etc.)
Basic Homeowners Insurance Coverage
How much insurance should you have? As you deep dive into the different types of insurance policies, you will find out there are different types of dwelling coverage options available to you. Namely, replacement cost coverage, actual cash value, special payment, functional replacement cost or market value coverage, or stated value.
Your policy's settlement of a loss will vary depending on the coverage you select at the time you purchase of your policy.
Actual Cash Value (ACV)
Sometimes referred to as depreciated cash value because it applies depreciation to the insurance carrier’s loss payment calculation. Actual Cash Value policy can provide a payout needed to fix or replace your home and belongings minus the value of your property because of age or use. Since coverage for your personal property is provided on an actual cash value basis, the amount you receive for a covered claim can be significantly less than the total cost of repairing damages to your home or replacing your belongings with new ones at current prices.
Replacement Cost Coverage
Replacement cost is not the market value of your home, nor is it the tax-assessed value. It is the current cost to replace the damaged property, with no deduction for depreciation due to the home’s age or even condition. In order to qualify for replacement cost coverage, you will most likely be required to insure your property to at least 80% of the replacement cost. As long as this requirement is met and if your home is damaged, or you have a total loss, your insurance policy will cover the total cost of replacing or restore your home using materials of similar quality.
Replacement cost coverage for your personal belongings can help cover the cost of buying a new item at today’s price. Just beware, you will never be paid more than the amount of coverage you purchased, so make sure your limit is sufficient.
Extended Replacement Cost
Also known as extended dwelling coverage or increased replacement cost is an add-on policy option that allow you to purchase additional coverage after a loss if unexpected events increase the cost of rebuilding. Extended Replacement Cost can expand your dwelling coverage by 10 percent to 50 percent of the cost of rebuilding your home.
Homeowners in disaster-prone areas may find it especially beneficial to have this extra protection, as prices for construction materials and labor can rise significantly after a disaster.
Guaranteed Replacement Cost
As the name implies, Guaranteed Replacement Cost coverage pays out any cost needed to rebuild your home in the event of a total loss, even if the bill exceeds the limits of your policy. Just be aware that while many homeowners find this coverage to be ideal, not all insurers offer it.
Special Payment
Special Payment is the loss paid before dwelling is repaired, rebuilt, or replaced.
Functional Replacement Cost or Market Value Coverage
Functional replacement cost or market value (also known as repair cost) is the cost to repair or replace the damaged property with equivalent construction for similar use, without deduction for depreciation. An example of functional replacement would be to replace a plaster wall with drywall. If it is a total loss and repairs are not made the payment amount will be the market value of the home.
Stated Value
If stated value coverage is selected, the maximum amount paid at the time of loss is the value of the policy, even if the loss amount is larger than the value of the policy. In other words, a selected value is established by the insured, and this value is the limit of liability.
| Actual Cash Value (ACV) | Replacement Value/ Replacement Cost (RV/RC) | Extended Replacement Cost (ERC) | Guaranteed Replacement Cost (GRC) | |
|---|---|---|---|---|
| Payout Covers | Replacement cost minus depreciation | Cost to replace property to same/similar value | RC/RV plus add-on percentage (i.e. 10% - 50%) | Full costs to restore/ replace asset |
| Depreciation Applied | Yes | No | No | No |
| Payout can exceed policy limit | No | No | Yes, according to addon percentage | Yes |
| Payout may be less than restoration cost | Yes | Yes | Yes | No |
| Protection against inflation and price surges | None | Some, up to the policy limit | Yes, up to the extended limit | Yes, up to full restoration at current costs |
| Payout Scenarios to Replace/Rebuild ($450,000 policy, after deductibles) | Destroyed roof Costs: $20,000 Payout: considerably less, depends on age of roof | Destroyed home Costs: $500,000 Maximum payout: $450,000 | Destroyed home Costs: $500,000 ERC option: 20% Maximum payout: $540,000 | Destroyed home Costs: $450,000 Payout: $450,000 |
Always review your policy or contact your agent to identify the limitations and exclusions of your coverage.
What’s covered in a standard home insurance policy and what are the basic types of coverage? How much insurance do I need and what factors should I consider when evaluating those needs? What questions should I ask when connecting with an insurance professional?
