Understanding your home insurance deductible can help you decide how best to protect what could be the most expensive purchase you’ve ever made. Unfortunately, it’s not always easy to understand the fine print of your font. Read on to learn how a homeowner’s deductible works, how it affects your premium, and how much deductible you might need.
Insurers generally define a dwelling as a physical structure used primarily as a private residence, such as a house, apartment, condominium, duplex, or townhouse. Attached structures, such as a garage, are considered part of a dwelling. External structures, such as a garden shed, are not.
What is home insurance?
Home insurance, also known as Coverage A in a home insurance policy, covers the physical structure of your home against specific types of risks and perils that lead to repairs or rebuilding. It does not apply to items inside your home or to free-standing buildings on your property.
When purchasing a home insurance policy, you can choose the coverage limit and home insurance deductible. Typical coverage limits range from $100,000 to $500,000, while deductibles can range from $500 to $2,000, depending on the policy and insurer. Insurers reimburse claims based on a fixed amount rather than a percentage.
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Homeowners can expect home insurance to cover their main structures against a variety of approved risks and perils, including the following:
- fire and smoke damagewhether caused by lightning, electrical malfunctions or a tea towel too close to the stove
- Storms or hailwhich can damage your roof, topple trees on your house, break windows and ruin siding
- Snow, ice and sleet, leading to frozen pipes or roof damage
- Water damagesuch as a damaged ceiling or walls from leaking pipes
- Blastwho can occur when spray cans malfunction or a gas grill burns out
- Motor vehicles that enter homes, causing significant damage to a garage door, for example
- falling objects, such as asteroids, satellites, airplane parts, and meteors (no matter how likely this is to happen)
- Vandalism, who may involve the intentional destruction of property
What does home insurance not cover?
Home insurance is just one type of coverage provided in your home insurance policy. While it protects the physical structure of your home from many perils, some things are not included in housing coverage.
- Flood can damage both your property and your home structure, but home insurance does not cover the associated costs. This is covered by a separate flood insurance policy. Depending on where you live, you may need to purchase this type of insurance.
- Earthquake can cause significant structural damage. Earthquake insurance is not necessary, even in areas prone to such activity. However, it will cover earthquake damage that home insurance will not cover.
- Poorly maintained accommodation can deteriorate due to a lack of normal maintenance, such as not replacing a leaky roof or not treating pest infestations.
- Sewer backups, sump pump issues, and other drain issues generally require a separate optional policy that covers specific water systems.
Home insurance coverage typically ranges from $100,000 to $500,000, depending on the policy, while deductibles typically range from $500 to $2,000. Before deciding how much home coverage to include in your home insurance policy, experts recommend estimating how much it will cost to rebuild your home in today’s market. You may want to contact a real estate agent or home inspector to help you. When choosing a deductible, choose an amount that you could comfortably pay out of pocket in the event of a claim.
Reimbursements for home insurance policies are based on the cost to replace or rebuild. Depending on the type of claim, insurers may or may not consider depreciation and normal wear and tear when issuing a payment.
What is Replacement Cost Value (RCV)?
Home insurance coverage is generally reimbursed on a replacement value (RCV), which means that you will receive up to a certain dollar amount in the event of peril or covered risk. If your home insurance has a coverage limit of $300,000, that’s the maximum amount you can receive (minus your deductible) to repair or rebuild your home.
If the final repair bill is more than your home insurance will cover, you’ll have to pay the difference out of pocket. To protect yourself from such an event, you may want to consider purchasing additional home insurance. This can take one of two forms:
- Extended replacement cost the policies incorporate a cushion to help you in the event of an unexpected replacement cost overrun of up to 25% or more over the limit of coverage for your home, depending on your insurer and your policy.
- Guaranteed replacement cost policies cover the final cost of replacing or rebuilding your home, regardless of the amount, although some insurers may limit this to a set percentage above your home coverage amount.
What is Actual Cash Value (ACV)?
If a covered peril or peril destroys part or all of your home, the property inside the home – your personal property – may be reimbursed based on replacement cost or actual cash value . Actual Cash Value (ACV) claim payments take into account depreciation and normal wear and tear, meaning you will receive fair market value for your property. In other words, the bedroom set you bought five years ago for $2,000 can only be valued at $1,000 if it were to be destroyed in a fire.
Keep in mind that your home coverage amount influences the other coverage amounts in your home insurance policy. Protection for personal property, loss of use, and other structures is usually calculated as a percentage of your home’s coverage limit. For example, if your home insurance has a limit of $400,000 and your personal property is set at 50% of that amount, your coverage limits would be $200,000.
When you live in a condo or co-op, you are only responsible for insuring the square footage you own. The main insurance policy for the entire building will affect the amount of coverage you need for your unit.
Condominiums typically use an HO-6 policy, which works the same as a standard homeowner’s policy. It often includes housing, personal property, personal liability, loss assessment and coverage for additional living expenses, but is limited to the part of the property you own. If a windstorm breaks one of your windows, your HO-6 home insurance will pay for the cost of repairs because a covered loss caused the damage. As with standard home insurance, HO-6 policies have their limitations. Floods, earthquakes, infestations and other perils are not covered.
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