Homeowners insurance or hazard insurance, can be confusing. It typically provides some amount of coverage for the home, attached fixtures and structures, personal property of the occupants, liability and temporary housing during repairs.
What Home Insurance is Right for You?
You should not assume that your homeowners insurance will pay to have your home rebuilt and refurbished after a crisis. A careful examination of your assets and financial situation will help a trusted agent guide you to the most appropriate coverage for you circumstance.
Common Types of Homeowners Insurance
Let’s say that you bought a new personal computer last year for $1500. Today that exact computer is being sold at the same store for $600 because a newer model has come out. Your computer has been used for a year so subtract 40% for depreciation leaving the value actual cash value of your computer as $360. Now extrapolate that to all of your belongs that are damaged in a covered loss.
You may choose ACV because it is the only option financially for you or because you are banking on there not being an issue. As you can see, if a loss occurs that requires you to collect on your policy, you will receive some money, but not enough to replace your belongings or home in full. If you choose an actual cash value policy, you will need to be prepared with a sizeable savings to offset what is not covered.
Replacement Cost Coverage pays for the replacement of your home and its contents, up to the limits stated in your policy. This sounds like a good option, and it very well may be, provided the amount stated is enough to cover costs (including inflation, cleanup, unforeseen problems, and scarcity).
Consider for example that you have a $300,000 limit. Let’s say that your area gets pounded with snow one winter and just as you recover from one storm, another comes, then another and so on. Part of your roof collapses under the weight; no one is injured but the damage is significant. To rebuild the damaged part of the house and replace your destroyed belongings, it will cost $360,000. Luckily the insurer is going to help you with $300,000 and the other $60,000 you will have to pull out of your 401K.
Extended Replacement Cost Coverage adds an additional (predetermined) percentage beyond the limits stated in your policy.
In the aforementioned example, let’s say that you had added an extended coverage of 20% to your policy which would cover the $360,000 to rebuild BUT now let’s say that as the roof came down, it spewed vermiculite insulation throughout your house and yard. You will have to have your yard contained and then hire a company to come assess how far the airborne asbestos has spread. After the assessment, you will have to hire another company to safely remove all traces of the insulation particles and any items in the home that cannot be decontaminated. You are fortunate enough to find a contractor and crew that can do the rebuild right away but the snow keeps coming, delaying or stopping the work many days. You end up needing temporary housing for several months. Because of these additional expenses (cleanup, decontamination, disposal of hazardous materials, replacement of all items that can’t be decontaminated and extended housing), the total cost is now $500,000. Your insurance company will pay for $360,000 but you will have to now take $60,000 out of your 401K and borrow $80,000 from your in-laws to pay the balance.
Guaranteed Replacement Cost Coverage provides unlimited coverage as long as you have followed all of the company’s guidelines.
In the example we’ve been using, if you had purchased guaranteed replacement cost coverage, you would not have to worry about the cost or any of the extra fees. You would be put up in comparable housing where you could comfortably stay until the reconstruction is completed.
Types of Coverage That Are Not Included in Standard Home Insurance
There are many items that are not included in a standard home insurance policy but can be added or purchased separately before any events occur.
- Flood Insurance (including water damage and mudflow)
- Earthquakes (including sinkholes)
- Backup of the Sewer System or drains
- War or Nuclear Incident
- Firearms and Weapons (valued over $1000 in total)
- Art, Furs and Jewelry (valued over $1000 in total)
- Renter or Tenant Insurance
- Rental or Landlord Insurance
Not everything in and around the home is covered or can be covered. Below are a few items that will never be covered:
• Failure to Maintain
• Wear and Tear
• Poor Craftsmanship
• Hidden Defects
• Rust or Rot
• Termite or Rodent Damage