Home Insurance—The Basics
Not a day goes by that there isn’t a new story about home insurance on the Internet, in your local or national newspaper, or on television. And while we all hear about home insurance on a daily basis, how much do we actually know about this important coverage? Let’s take a look at some of the basic questions consumers have about home insurance.
Who needs home insurance?
Every homeowner who can’t afford to pay, or doesn’t want the financial burden of paying the high cost of replacing a home that has been devastated by fire, hurricane, tornado, or other insurable event, needs home insurance. If you have a mortgage on your home, you will be required to have a home insurance policy because the financial liability of a potential loss lies with your lender. If you do not have a mortgage, then no one will force you to have home insurance, but without this important coverage you will have no protection against the financial loss that a natural or man-made disaster can cause.
Imagine having to tap into your retirement savings and facing potential tax and early withdrawal penalties in order to rebuild and refurnish a home lost to fire. While you might have the savings to do so, do you really want to risk your comfortable retirement? Instead, with a home insurance policy, you can look to your insurance company to carry the costs above your deductible and below your limit.
What does home insurance cover?
Home insurance covers many different situations, and you have to look at your individual policy to find out the details of your coverage. In general, some of the coverages you can expect with your policy include:
- Loss of the main structure.
- Loss of use.
- Loss of outer buildings.
- Loss of contents/ personal possessions.
- Liability coverage.
- Damages to the outer building, contents or main structure.
There are many different classes of home insurance, and many different coverage options to choose from. If you live in a condominium or townhouse, you will have coverage that focuses on the internal walls and contents rather than exterior areas.
What doesn’t home insurance cover?
Depending on the choices you make when applying for home insurance, your individual policy may not cover certain events that your friends, neighbors’ and family members’ policies do. But no home insurance policy will cover things like:
- Flood damage.
- Mold removal or damage.
- Bed bugs.
- Everyday wear and tear.
- Acts of war.
Again, it is important not to over-generalize coverage restrictions. To find out what your policy does and does not cover, you should read your actual policy pages.
What are limits?
One way to control the cost of your home insurance policy is to adjust the limits on the policy. Limits are the maximums that an insurer will pay toward damages caused by an insurable incident. In home insurance policies, there may be several different limits set for different coverages. For instance, your contents may have a limit of $50,000 while your structure is insured up to $150,000.
While lower limits create a less expensive home insurance policy, they also expose you to additional risk because if your actual damages exceed the amount of your limits, you must pay the difference out-of-pocket. On the other hand, if you choose limits that exceed the actual value of your contents or rebuilding costs, then you will not be paid that excess if you suffer a total loss because the goal of insurance is to make you whole, not to give a profit.
What are deductibles?
Another way to control the cost of your policy is by agreeing to take on part of the financial burden that an insurable loss involves. You do this through having a deductible. The deductible is the amount that you must pay out of your own pocket for damages. Any financial liability above that amount, but below the limit, is handled by the insurance company.
For example, let’s say that during a hurricane, your roof is damaged. The insurance company assesses the damage and says that they will cover it, and the total of the damages is $5,000. If your deductible is $1,000, then you will be responsible for paying $1,000 toward the repair while your insurer will pay the remaining $4,000, provided that does not exceed your limit.
Home insurance policies can sometimes have more than one deductible. A common example of this is in certain East Coast states with annual hurricane exposure. Many home insurance policies issued in those states have a special hurricane deductible that is higher than the standard deductible and applies any time damage occurs due to a hurricane.
While home insurance may technically be an optional policy for some home owners, the reality is that few investments have such an affordable source of financial protection against loss. And not only can home insurance help you protect your future financial goals, it can also give your family the means to ensure their comfort quickly after a disaster.