Buying a home is the largest individual purchase adults make in their lifetime. Many times purchasers must use a financial institution and secure a loan to make the purchase and one of the requirements of the loan is the purchase of homeowners insurance. Buying insurance can be just as challenging as the home purchase itself because the consumer does not necessarily have the time to read or understand the policy they are sold.
In today’s insurance market there are many options and most consumers are inundated with ads on the radio, TV, billboards, etc. about how one company or another can protect you from all sorts of perils associated with owning a home. While the advertisements may be true in protecting your investment, there is a fine line to what the policy does protect you against. A homeowner insurance policy is a contract between you, an agent, and carrier and is usually written in accordance to one of three forms; basic, broad, or special. Each form provides different levels of protection and depending on the one sold to you determines the amount of coverage you have. Correct coverage for your home is important for a couple reasons; one is your mortgage agreement requires you to insure your home at replacement cost, and two is being correctly covered allows you to fix, rebuild, and replace what was lost in the event of a claim.
When reading or reviewing your insurance policy you will see the terms such as Actual Cash Value (ACV) and Replacement Cost (RC). It is important to understand these terms and what they mean to you at the time of loss. To briefly explain ACV is simply the value of the property at the time of loss including depreciation. An example of ACV is this; your home’s roof is 16 years old and a recent windstorm damaged a large portion of the roof. The insurance company will take the replacement value of the roof, subtract the age of the shingles and settle the claim based on the value of a 16 year old roof meaning the insured is responsible for the remainder of cost to replace which potentially could equal thousands of dollars. If your policy has the replacement cost option, other than your deductible your roof is replaced at full value. It’s obvious what the best option is in the event of a loss. Making sure your home insurance policy is written with the replacement cost option is important making sure you are not left with the extra expense due to the lack of coverage.
Homeowners’ insurance policies are not created equal and being an informed consumer will lead to understanding your policy coverage. I encourage you to take the time to do a review of your policy and check with your agent to make sure they have you covered correctly. Much like regular service to your car; completing periodic reviews of your homeowners insurance keeps you aware of your coverage which will provide it’s value in the event of a claim.