Homeowners insurance basics to know
As you’re researching home insurance policies, here are some home insurance basics that can help you choose the right amount of coverage for your unique situation.
Your home insurance deductible is the amount of money you pay before your insurer helps pay for a covered claim. For example, say your deductible is $1,000 and a huge tree falls on your roof, causing $10,000 worth of damage. In this circumstance, you’d pay $1,000 out of pocket and receive a payout of $9,000.
Insurers often offer a minimum deductible of $500 to $1,000, according to the Insurance Information Institute. You can choose a higher deductible amount to save money, but the downside is that you’ll pay more out of pocket if you need to file a claim.
When choosing your deductible, make sure to select an amount that you’d feel comfortable paying in the event your home is damaged or destroyed.
Replacement cost vs. actual cash value
Replacement cost and actual cash value are two ways your insurance company reimburses you for a covered claim.
Replacement cost coverage: If you have this coverage, your insurer will pay to repair or replace your home with similar construction materials and replace your personal items at today’s prices.
Actual cash value coverage: With this coverage, your insurance company will factor in depreciation when reimbursing you for a covered claim.
For example, imagine you purchased a gaming laptop five years ago for $3,000, but it’s now worth $1,000. If you had replacement cost coverage, you’d receive enough money to buy a laptop of similar quality once you met your deductible.
By comparison, with actual cost value coverage, you’d receive $1,000 after meeting your deductible — the gaming laptop’s current value.
Which coverage option is best for you depends on your preferences and unique financial situation. Actual cash value coverage usually costs less, but the downside is that you’ll pay more out of pocket to replace your belongings. With replacement cost coverage, the cost of your policy will be higher, but you’ll pay less out of pocket after a covered event.
Most insurance companies provide replacement cost coverage for your dwelling, according to the Insurance Information Institute. But check with your insurer to make sure that’s the case.
Do you need flood insurance?
Although flooding is one of the most common natural disasters in the U.S., standard home insurance doesn’t protect your home against flood damage. If you live in a high-risk flood area and have a mortgage, your lender will likely require you to purchase a separate flood insurance policy. But if you live in a lower- or medium-risk area, flood insurance is usually optional.
Even if you own your home outright or don’t live in a flood zone, purchasing a flood insurance policy can be beneficial. To protect your home against flooding, you’ll need to purchase a flood insurance policy from a private insurer or the National Flood Insurance Program (NFIP).
Do you need earthquake coverage?
Standard home insurance doesn’t cover earthquakes, either. Even if you have a mortgage, a lender won’t require you to purchase earthquake coverage. But if you live in a high-risk earthquake area, adding an earthquake endorsement to your current policy or purchasing a separate earthquake policy can be a good idea.
Other optional coverages to consider
If your goal is to maximize your home’s protection, consider adding these coverages:
Scheduled property coverage: If you own a high-value item — like an expensive engagement ring or a firearm — a standard home insurance policy most likely won’t cover the market value of the item. But you can purchase a scheduled property endorsement to cover the item for its appraised value.
Water backup coverage: Basic home insurance typically doesn’t cover water damage to your home caused by your sewer pipes backing up. But you can add a water backup endorsement to your existing policy that can help cover water damage caused by a sewer backup in certain circumstances.
Windstorm coverage: Although windstorm damage is often covered by a standard home insurance policy, insurance companies in some coastal states might require you to purchase a separate policy to cover hurricane and hail damage to your home.