What are the most important things in homeowners insurance?
Most people do not think twice about their homeowner’s insurance, believing it is simply a requirement for them to get a mortgage. However, it is in your best interest to “tweak” your homeowner’s insurance policy to fit your needs and even consider getting a home warranty from the best home warranty company in the area. There are several important things in homeowners insurance that you need to be mindful of before you sign the contract. This article will help you make the best decision by explaining what exactly is homeowners insurance and what are the things you want to look out for.
What is homeowners insurance, exactly?
Homeowners insurance is pretty much the same as any other insurance policy. You are paying a certain premium to make sure that you are protected from certain events. However, due to the almost infinite customizability of these policies, they can be a bit tricky to evaluate properly. A homeowners insurance policy will, in general, cover any damage or destruction to the interior and the exterior of your home, as well as theft and personal liability to harm that happens to others inside your home.
To break this down a bit further, exterior/interior damage includes any damage from a fire, hurricane, lightning, vandalism, and similar disasters. The policy, however, does not include coverage for earthquakes and floods. Nor does it include any damage due to regular wear and tear or lack of maintenance. Your homeowner’s insurance will not cover a leaking roof, either, you will need home warranty roof leak coverage for that. That being said, the actual amount of coverage depends on the premiums that you pay. Standardized homeowners policies are designated HO-1 through HO-8, with the latter offering the highest coverage.
Three types of homeowners coverage
One of the most important things in homeowners insurance is their coverage level. Every policy has one of the following coverage levels:
- Actual cash value
- Replacement cost
- Guaranteed (extended) replacement value
One of the most frequent mistakes that home buyers make when purchasing their homeowner’s insurance policy is to insure a home just enough to cover their mortgage. However, by doing so, they in fact insure only about 90% of their home’s value. Thus, it is very important to fully understand the limitations of each coverage level before you sign anything.
Actual cash value
This coverage level will cover the cost of the home and belongings inside it after depreciation is deducted. What this means is that the insurance company will look at the current worth of your items, not how much they were worth when you paid for them. To illustrate the point, let’s say that you get your laptop stolen. If you have ACV insurance, you will be reimbursed for how much that laptop might have sold on today’s market. Needless to say, this can be quite lower than its original price. Purchasing an ACV policy without thinking about the restrictions is pretty much one of the most common mistakes made by first time home buyers, in fact. The policy has its place, due to lower monthly premiums but it is not ideal for everyone.
It is argued that most insurance companies prefer ACV policies, as depreciation is not always easy to figure out. It is for this reason that this coverage level usually looks the most appealing, with the lowest monthly payments.
The second coverage level, replacement cost, does away with depreciation. This coverage level will have the insurance company provide you with the funds to replace the damaged/lost property with property of similar value. What this means is that you may get the funds to replace your property with one that is of comparable quality and material to the one that you had. The difference between replacement cost and actual cash value coverage is that the replacement cost does not account for depreciation. You will get the funds to replace/rebuild up to the original home value.
However, you also need to take note of the replacement limitations. If your insurance limit exceeds the cost of replacement, you will not be able to get full coverage. That is why one of the most important things in homeowners insurance is to know your policy limitations and account for them. For example, many people choose to go with lower homeowner’s policy limits and compensate them by purchasing a home warranty. When it comes to homeowners insurance vs. home appliance insurance, it is best to have them both, after all. No single policy will protect you from all the possibilities. But both of them just might.
Replacement cost coverage is usually more expensive than the actual cash value due to the lack of depreciation. It is up to the homeowner to decide which is the best option.
Guaranteed (extended) replacement value
The last coverage level is the most comprehensive one. Guaranteed replacement cost value will pay for the current cost of the repairs/replacements, even if they are higher than the policy limit. There is also an alternative, the extended replacement value, where the policy will cover up to a certain percentage above the original purchase cost, usually 20-25%.
Needless to say, this is the most expensive homeowners insurance policy but is also the one that provides the most protection. Many professional insurance advisors believe that this is the only coverage level that homeowners need to consider. However, the reality is that the actual cost of these policies might significantly offset the benefits, especially in homes that are located in low-risk areas and homes that have a lot of home repairs that you can do yourself. But even in those cases, the peace of mind that this coverage level provides is usually worth it.
The most important things in homeowners insurance
Now that you know what homeowner’s insurance is all about, and its coverage levels, it is time to figure out what are the most important things in homeowners insurance. Here are the things that you will want to consider before purchasing a homeowners insurance policy:
- Claims process
- Personal injury liability
All of the above things have one thing in common. They allow you to figure out exactly what you are getting from your insurance provider. You never want to be in a situation where you think you are covered when, in fact, you are not.
It is extremely important to understand when you are getting your money after a disaster occurs. Some homeowner’s policies will only provide you with reimbursement after you have actually replaced your items or repaired your home. Others may provide you with a check upfront. Furthermore, you need to understand the timetable in which you can expect your insurance money. Therefore, before signing the policy, make sure that you have the insurance agent thoroughly explain the entire claims process. Inflation is also one of the reasons why you need a home warranty plan in addition to your homeowner’s insurance.
Most homeowners’ policies will place a limit on the reimbursement amount for extremely valuable items. This means that you will only be reimbursed for a fraction of the item’s value. If you want to make sure that your items are fully protected, you will need to include floaters in your policy. Including a floater might mean an additional expense but it will protect your item to its full price, no matter what.
Over time, inflation may drastically change the value of your home. That is why you need to make sure that your homeowner’s policy properly accounts for inflation. This is something that you may want to do each year before renewing the contract. Simply talk to your agent and have them verify that the coverage numbers are still realistic. Otherwise, you may find yourself paying for some repairs/replacements out of your own pocket, despite having insurance.
Personal injury liability
One of the key aspects of homeowner’s insurance is the fact that it protects you from personal injury lawsuits for injuries that occur within your property. That being said, some insurance policies come without personal injury liability coverage. Since this coverage is one of the most important things in homeowners insurance, it is in your best interest to make sure that your policy has it included. The worst thing that can happen is for you to assume that your policy covers personal injury liability when, in fact, it doesn’t.
Lastly, you need to carefully consider deductibles when purchasing a homeowner’s insurance policy. Ideally, you will want a single, simple-to-understand deductible instead of several separate deductibles. The reasoning behind this is that unreachable deductibles may prevent you from getting the coverage you need in case of a disaster. Thus, deductibles are one of the most important things in homeowners insurance. Make sure that you fully understand them and what they mean for your future.
Lastly, homeowner’s insurance does not protect you from any damage caused by regular wear&tear. For that, you will need to get a home warranty. If you want to find out more about the best home warranty companies, as well as any information about the home warranty itself, refer to Consumer Opinion Guide. We will help you make the best decision when it comes to protecting your home!