Homeowners' Insurance 101
You’re about to make a significant investment, and it makes sense to protect it. That’s where homeowners' insurance comes in —– it covers you in the event your home is damaged or destroyed. Your lender requires that you get insurance and prove you’ve done so by the time of the official closing. However, don’t just rely on the coverage levels mandated by your lender. Those levels are designed to protect the house itself, but not necessarily your possessions.
Here are some concepts and choices you should understand before you compare homeowners' insurance quotes.
Five Insurance Choices
1. Policy Types
There are several different types of policies. There are even more if you’re a renter or live in a condo or co-op, thought we won’t cover those here. It’s important to understand the differences between the policies before you choose.
A peril is the type of disaster that might occur to your home. There are 16 types of perils, ranging from the typical (fire) to the unusual (vandalism) to the seemingly ridiculous (exploding volcano). That said, crazy things do happen, and you need to ensure your particular policy protects you against things that could possibly happen in your area.
Within each type of insurance, you must choose what — or who — within or around your home you wish to protect. There are six different coverage options (Coverage A – F).
You must carefully read the exclusions statement that comes with any potential policy. Even if you buy an “all perils” policy, this doesn’t mean it actually covers all perils. In fact, most insurance policies don’t cover flooding, even though flooding is one of the most common ways damage occurs to a home. Flood insurance must be bought separately. So make sure you’re just as comfortable with what your policy excludes as you are with what it contains.
5. Replacement Cost vs Cash Value
In the event of a disaster, you’ll need to choose whether you want to cover the cost of replacing lost or damaged items, or just get money for their actual current value. It’s the difference between replacing your five-year-old sofa with a new one that costs $800, or getting $200 — the depreciated price of the sofa the moment it was burned in the fire.
We’ll make this decision easy on you, and strongly recommend getting replacement value insurance. You shouldn’t care how much your possessions would fetch on the open market. It’s better to be able to replace anything you lose with similar, new items.