What kind of home insurance should I get? How much coverage do I need? Is my policy too expensive? These questions are common ones, especially after moving into a new house or apartment.
Homeowners insurance protects against damage caused by natural disasters such as hurricanes, tornadoes, floods, earthquakes, etc. Homeowners’ insurance costs vary depending on where you live and whether you want additional coverage.
You don’t always need full coverage. If you only plan to stay at your current residence for less than five years, then you can save some money by choosing a basic policy.
Is homeowners insurance required?
Homeowner’s insurance isn’t required by law, but it’s still recommended. Lenders will want proof of coverage, and some states require you to carry it.
A mortgage company will usually require it. But check with your local government. Some states don’t require it.
Types of homeowners coverages
Homeowner’s insurance combines several types of coverage into a single policy. These coverages pay a different amount depending on what happens to your home. There are two main types: standard and extra. A standard policy typically covers everything except personal liability and lost use. An extra policy adds those two types of coverage to the basic one.
Medical payment pays for injuries that occur on your premises. Your policy will pay for emergency room visits, hospital bills, ambulance rides, and doctor fees.
Liability protection protects you from lawsuits filed by others who suffer injury or damage because of an accident involving your home or belongings. This coverage is important to protect yourself from legal action if someone slips and falls on your stairs or gets hurt while working around your pool.
What risks does a homeowners policy cover?
Your homeowner’s insurance policy protects you against certain types of losses. But it doesn’t protect you against every risk. Some risks aren’t even covered. Here are three things to know about your homeowner’s policy.
1. What Risks Are Not Covered?
Most home policies provide protection against loss caused by fire, lightning, windstorms, hail, smoke, vandalism, theft, explosion, falling objects, riot or civil commotion, aircraft, vehicles, animals, and damage to property owned by others. However, several exclusions could limit or eliminate your coverage. For example, most policies don’t cover flood damages unless the water rises above the floor level of your house. They also won’t pay out if you’re sued because someone slipped and fell on your property.
2. How Do I Know If My Policy Covers This Risk?
You’ll want to check your policy carefully to ensure it includes the risks you face. You can do this by looking up the specific items listed under “Losses We Cover.” These include:
Replacement cost vs. actual cash value coverage
The difference between replacement cost insurance and cash value insurance is pretty simple: replacement cost covers how much you’d pay to replace something like a car or house; actual cash value covers how much you paid for it. But there are some nuances worth knowing about.
For example, you bought your home 10 years ago for $200,000. If you want to know how much money you could spend replacing your home today, you will use the current market value of homes in your area. In this case, the average sales price of homes in your neighborhood is $400,000. So if you wanted to replace your home, you’d pay around $400,000.
But if you had purchased your home for $200,000, you wouldn’t necessarily be able to afford to replace it for $400,000. You could find a comparable home for $300,000, but you’d still spend $100,000 more than you originally did.
Now let’s look at another scenario. Let’s say you bought your house 20 years ago for $50,000. Today, the average sales price for houses in your area is $150,000. This means you’d be able to replace your home for $150,000. However, since you originally paid $50,000 for your home, you’re getting less than you paid.
So why does replacement cost cover things differently than actual cash value? Because replacement cost is supposed to represent the amount you’d pay to replace your property today. As such, it doesn’t matter whether you paid $50,000 or $500,000 for your home.
However, the actual cash value reflects the amount you paid for your home. So even though you paid $50,00 for your home, if you replaced it today, you’d only be paying $50,000.
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