Here Is What Is Really Covered by Your Home Insurance Policy

The only thing that most people know about home insurance is that their lender required them to purchase it when they bought their new home. In other words, they basically have no idea what their policy really covers. In this post, we’ll provide a breakdown of exactly what your policy does and does not cover.

Two Primary Sections

The Insurance Information Institute reports that a typical home insurance policy has two primary sections: Section I covers the actual property, while Section II provides liability protection in the event that you are sued over something that happens on your property. Everyone who owns or leases a property should carry this kind of insurance. Typically, home insurance is required by mortgage lenders before you can obtain a home loan. In summary, Section I of the policy covers damages that occur to your home, and Section II covers damages/injuries that happen to visitors on your property.

Your Belongings

Now you know the structure of your house is covered, but what about your personal belongings? Most home insurance policies automatically include coverage for the contents of the home, but only provide about 40% of the coverage of the policy amount. For instance, if your house is insured for $200,000, your belongings would be covered up to $80,000. If you have items of exceptional value in your home, such as jewelry, furs, collections, electronics, etc., then you might want to purchase extra coverage for these items. Extra coverage for items of extraordinary value is called an endorsement or rider. Possessions kept outside your home are usually covered as well, up to 10% of your policy’s value. For example, if your child’s laptop is stolen from his/her dorm at school, your policy might cover it. Similarly, if your golf clubs are stolen from your car, your policy will also likely reimburse you.

Replacement Cost vs. Actual Cash Value

Understanding the difference between replacement cost and actual cash value is critical to making sense of your home insurance policy. While your home is insured for replacement cost, meaning how much it would cost to replace your home at current prices, your belongings might be insured for actual cash value. Actual cash value means you would only receive reimbursement that is equal to the current value of the item today less depreciation. If you would like your policy to give you enough money to buy the same items brand new at today’s prices, you will need to opt for actual cash value coverage.

Your Deductible

The last important component of your policy is your deductible. A deductible is the amount you must pay out of pocket in the event of a covered loss before your insurance will begin reimbursing you. For example, if your deductible is $500, you will be responsible for the first $500 of any damages or losses that occur. Raising your deductibles to the highest level you would be able to pay out of pocket can help you save on your premiums.

Additional Resources

• Top Things to Know about Home Insurance
• 12 Ways to Save Money on Home Insurance

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