If you are buying your first home, some of the terms used in homeowners insurance policies can be confusing. Even if you have owned properties before, you may not have realized the full implication of some of these terms.
Your home is one of the most significant purchases you will make in your life. So, you will want to protect your investment. But, if you do not understand the insurance terminology, you may find yourself not adequately covered when you need to claim on your insurance.
Here are twelve of the terms you need to understand before you buy homeowners insurance.
Peril refers to the events that could cause a loss, such as theft, fire, lightning strikes, and water damage. The perils that your insurance covers will be listed in your policy. It is advisable to check which of the perils are covered by your home insurance. If you live in an area prone to hurricanes, for example, you may need separate hurricane insurance.
The dwelling coverage covers the structure of the property. This element of your home insurance will help you pay for the repair or rebuilding of the building. Dwelling coverage also usually includes items physically attached to the main structure, like fireplaces, garages, and porches.
Other Structures Coverage
The other structures portion of your insurance covers things like fences, outbuildings, and sheds. The other structures coverage is usually limited to 10% of the dwelling coverage. You will need to ask for additional cover or take out a separate insurance policy if the value of your other structures insurance is insufficient for your needs.
The contents coverage of homeowners insurance covers you for your home's contents, including things like furniture, appliances, and clothes. Contents insurance will help to pay for the replacement of personal possessions if they are stolen or damaged by a peril such as a fire. However, it is essential to note that high-value items such as jewelry may not be covered by standard contents insurance.
Liability insurance covers you for injury claims made by visitors to your home. The insurance will usually cover legal fees, compensation, and medical costs. It is advisable to check the claims limit on home liability insurance because standard policy limits can be relatively low. You can, however, pay for excess liability or an umbrella policy to increase your cover.
An umbrella policy provides additional coverage over and above what a standard homeowners insurance policy covers. So, suppose a guest in your home is injured, and their claim exceeds the limit of your liability insurance. In that case, the umbrella policy will cover the excess. The coverage provided by an umbrella policy is usually limited to third party claims.
The deductible is the amount you will pay to repair or replace items before the insurance policy comes into play. Increasing the deductible is one way of reducing homeowners insurance premiums. But, of course, increasing the deductible will also mean that you will have to pay more out of your pocket before you receive any money from the insurer.
The replacement cost is the cost of replacing damaged or lost property at its current value. This type of coverage does not consider depreciation; it would replace old items with new ones. Most insurance policies cover you for the replacement cost. However, it would still be advisable to check this on a homeowners insurance policy.
Actual Cash Value
The actual cash value is the current value of your property and possessions. This method of valuation, which is the alternative to replacement cost, does allow for depreciation. So, suppose you had a five-year-old TV stolen. Then, actual cash value insurance coverage would pay out the cost of replacing your TV with another five-year-old TV.
Extended Replacement Cost
Standard replacement cost homeowners insurance would cover the rebuilding of your home up to the property's value at the time it was destroyed. However, there are situations when returning your home to its original state would cost more than the property's value. Suppose your home got burned down in a wildfire, for example. Then, your neighbors will also be rebuilding their homes, which would increase the demand and cost of material and labor. Extended replacement cost extends your coverage to account for this type of increase in replacement cost or market value.
Additional Living Expense
Additional living expense coverage will pay your living expenses should your home be uninhabitable. This type of insurance will usually cover temporary accommodation, emergency clothing, and pet boarding. Additional living expenses are typically paid based on a daily allowance.
An endorsement, or rider, is an additional clause that tailors a standard insurance policy to your circumstances. A policy endorsement would amend the terms of your policy if you took out extra coverage for a valuable piece of jewelry, for example. On the other hand, an endorsement might exclude certain types of claims. So, it would be wise to check what endorsements there are on a homeowners insurance policy.
As you can see from the above, some of the terms used in homeowners insurance policies can be confusing. Even so, it is always advisable to read the fine print on your insurance documents to ensure that you have adequate coverage. If you are unsure about anything in your insurance policies, ask your insurance agent to explain it to you.