Whether you are buying a home for the first time or just want to be better informed you need a basic understanding of the insurance terms outlined in your policy.
If, like most Americans, you have a mortgage, your loan company will require you to buy insurance on your house in order to protect their interests. Since you are required to have homeowner’s insurance, you should understand how it protects you.
Insurance requirements vary from state-to-state and company to company, but basic terms and coverages are standard across the industry. Let’s start with the term “coverage for structures.”
This is the wording in your policy that explains how much the company pays to repair or rebuild your home in case it is damaged by wind, fire, hail or lightening. Losses due to sewer back-ups, floods and earthquakes may be covered under riders on your individual policy or through separate policies that you buy. If your home is in a designated flood zone, your mortgage company will require you to buy a flood insurance in addition to your regular homeowner’s policy.
The structure clause includes a deductible. The deductible is the amount of money you agree to pay toward repairing or replacing your home. The amount is usually $500 or $1,000. It can be as high as $2,500 depending on your company. Generally the higher the deductible you agree to pay if you suffer a loss, the less you will pay for your annual premium.
The term replacement cost tells you the most your insurance company will pay to rebuild your house it if is completely destroyed by wind, hail, lightning or fire. This coverage is based on building supply costs and not the market value of your house. Generally companies cap this coverage. For example if your house is insured for $200,000 and it costs $350,000 to rebuild it, your company may limit itspayments to $300,000. You would have to pay the difference or choose a lesser-quality flooring or lighting fixtures than originally installed in your home.
Let’s talk about contents coverage. Under this clause, your insurance company will pay to replace any personal property damaged or destroyed by fire, wind, hail or lightning. This includes everything from electronic equipment and appliances right down to clothing, rugs and furniture.
People who keep expensive jewelry, fine arts and collectibles in their home may want to add a special endorsement to their policy. This means you are buying additional protection for expensive or one-of-a-kind items beyond what is provided under your general policy. This also adds to the annual premium you pay.
Your homeowner policy includes liability protection. The insurance company will pay medical and legal costs if someone is injured on your property due a fall or other accident. This coverage includes claims filed because of the behavior of your dog or your children. Remember, your policy will spell out the maximum amount the company will pay toward liability losses.
You can increase your liability protection by purchasing a separate umbrella policy. This comes with an additional out-of-pocket cost for the homeowner but will provide added protection from $1 million or more, depending on your individual needs.
Now you have a basic understanding of your homeowners insurance policy. If you have more specific questions about your protection, contact your agent.