August 25, 2022

Knowing home insurance: Boring, but very important

It may not be the most interesting subject in the world, but every person who has a home mortgage or plans to get one will be required to purchase homeowner insurance.

It is important to understand insurance basics – premiums, deductibles, and limits of coverage.

The premium is the amount the insured pays for coverage on the home or item. Insurance underwriters use vast stores of data to determine a premium reflecting the likelihood of an applicant making a future claim.

The deductible is the amount of money the insured agrees pays out of pocket before the insurance coverage kicks in. In general, when the deductible amount rises, the premium will decrease. The reverse – higher premium, lower deductible – is also true.

The limit of coverage is the maximum amount the insurance company will pay on a claim – set for each primary component of a homeowner policy - structure, personal property, and liability.

Most insurance policies only cover replacement cost for the structure and actual cash value (ACV) of personal property, so the policy covers personal items at a depreciated value. Most insurers also offer replacement cost coverage for personal property as an option.

Liability coverage is to protect others and their property while they are in your home. It generally covers court costs, attorney fees, and settlements.

Additional outlined coverages on your home policy include “other structure,” “loss of use,” and “medical expenses.”

Every homeowner policy spells out the “perils” under which a home or property will be covered. Coverage can be provided from “all perils” or “named perils.”

“All perils,” also known as “broad coverage,” may sound like it covers everything, but it really does not. However, the insurer is obligated to specifically list what is excluded.

If a broad policy does not include everything the insured potentially sees as a future peril, a “named peril” policy can help to fill in those holes.

Insurance companies also provide “specialty coverage.” Many homeowners select specialty policies to cover things like antique vehicles, recreational vehicles, watercraft, and ATVs.

Insurance rates are on the rise. It behooves homeowners to shop around regularly for better rates. Like the ads say, “bundling” home and auto insurance with the same company is one of the most straightforward ways to get a discount. Upgrading the roof, home systems, and/or safety and security equipment can also bring down policy costs. Other discounts may be available. Ask your agent.

As with any insurance, the greater the risk, the higher premiums will be. Risk reduction may require upfront investment but be worthwhile in the long run.

Improving your credit score may help. Generally, the better your credit rating, the lower the premiums.