Insurance For Home: Are You Confused About Homeowners Insurance?

By Natalie Parchek

While most people are pretty familiar with the ins and outs of their car insurance, it seems like homeowners insurance can cause even the savviest of us to break out in a cold sweat. Here is the ultimate quick guide to homeowners insurance for all of us!

Homeowners insurance is a requirement for a mortgage because the property itself acts as collateral on the mortgage loan, and the mortgage holder wishes to ensure their investment is safe and they’ll be able to recover costs in the event of a disaster. But even for those property owners who don’t have a mortgage, having homeowners insurance is necessary to protect their investment in the property and insure against loss.

Homeowners insurance also protects against liability losses, which could occur if someone is injured on the property. The policy holder should insure only the improvements to the property, and not the land itself. Improvements will include the home and all usable outbuildings and other improvements.

What Losses are Covered by Homeowners Insurance?

Loss coverage will vary depending on how the policy is written, as well as options the policy holder may or may not choose to pay for, but generally the following are covered:

• Damage caused by natural causes such as wind, hail, lightning, freezing, volcano, and other naturally caused disasters
• Fire and smoke damage and the water damage caused by firefighting crews
• Falling objects
• Explosion
• Flooding caused by plumbing overflow
• Water damage caused by a hot water heater bursting
• Malfunction of the heating system and subsequent damage due to lack of heat
• Theft, which includes counterfeit currency, forged checks and unauthorized use of credit cards
• Riot
• Power Surges

There are many different parts of a homeowner’s insurance policy and there may also be coverage for incidents such as lock replacement, debris removal, food spoilage, and temporary repairs. Policy holders may also be at least partially reimbursed for “loss of use” if the home is made uninhabitable and there is a need to secure temporary living quarters while repairs are completed.

Floods, earthquakes and hurricanes are covered separately either by a separate policy or as an endorsement to an existing policy. The mortgage issuer will specify what is required for the loan to be funded and secured. Different jurisdictions have different requirements and rules so check with your Insurance provider.

Homeowners Insurance Glossary

Actual Cash Value: If the policyholder insures their personal belongings for actual cash value they will be reimbursed only what they’re worth at the time of loss, less wear and tear and depreciation. For example, a five year old stereo system may only be reimbursed for $30 instead of the $700 it cost when purchased new.

Replacement Cost Value: If the policyholder insures their personal belongings for replacement value, then their 5 year old stereo system will be valued at the amount it would cost to replace it at the time of loss.

Endorsement: An addition to the policy which incurs an extra fee. This is also known as a rider or a floater.

Deductible: This is the amount that is deductible from personal property losses at the time the loss is calculated. This amount is not reimbursed. Raising the deductible amount will lower the policy premium.

Rebuilding Cost: The amount it would cost to rebuild the home, which is most often greater than the price paid for it by the policyholder. It is generally a good idea to insure for 100% of rebuilding cost. Policy holders should also adjust their policies when any improvement is made to the property that affects the value and the rebuilding cost. Periodic adjustments should also be made to reflect increases in the real costs of rebuilding.

Inflation Guard Clause: Some policies have or can have a clause added that will automatically adjust the rebuilding cost limit at the time of renewal to reflect changes in construction costs.

Guaranteed Replacement Cost Insurance: This is a separate policy that guarantees replacement cost to rebuild the property as it was prior to the fire or other disaster, even if the homeowners insurance policy limit is exceeded. This may be an important consideration with a historical property.

Special Limits: Certain personal property, such as silver, jewellery or furs, have special limits placed on their replacement costs. Some insurers will also place special limits on computers and other office equipment. A special personal property endorsement to cover these items for full replacement value can be purchased for an additional fee.

Author Bio: Natalie is a freelance personal finance writer and proud “parent” of 2 English Bulldogs. She contributes for a consumer resource website for finding homeowners insurance quotes and an auto insurance guide. When she is not writing she can be found attempting to renovate her basement!