No one likes paying high insurance premiums, but for homeowners, their insurance policy is often the only thing protecting them from a worst-case scenario.
In the event of a fire leading to extensive or a total loss, how much would your home insurance cover? Do you have enough savings to cover the difference in costs and still rebuild?
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Knowing what your insurance policy will cover and how much money your insurer should provide if you lose your home in a fire can give you peace of mind and help make sure you are ready for anything. When you dig into the numbers, you should see if your coverage is lacking anywhere and what you should think about updating. Insurance policies should be reviewed on a yearly basis.
As you review your insurance policy, keep in mind that the insurer’s goal in homeowners insurance claims is to reduce their own expenses. If they can find a reason to reject part of your claim or reduce the amount they have to pay, they will take it.
These are the top things in your insurance policy to carefully read when you’re reviewing your coverage.
#1 Covered Perils
A covered peril is an event leading to damage to your home that the insurance company will cover. There are some perils that are standard in homeowners’ insurance policies, and fire is a major one. But fire isn’t the only threat to your home.
There are usually two types of perils: named perils and open perils. Named perils include things like fire, theft, windstorms, smoke, freezing, etc. An open peril policy covers all sources of damage except for perils specified in the policy. These exemptions might include earthquakes or flooding and may require additional coverage.
Assess the most common risks to your home and make sure they are covered perils.
#2 Actual Cash Value or Replacement
The type of coverage you have can have a significant impact on your total payout. If your policy provides Replacement Cost coverage, you are likely to see a higher payment, as it covers the cost of an equivalent replacement. For example, if it costs $500 to replace your sofa, that is the coverage you will receive (minus the deductible).
Actual Cash Value pays out the value of the item you lost and takes depreciation into consideration. If the couch you have is several years old, you may only receive $200 for a couch that costs $500 to replace.
This can be especially difficult given how inflation has caused prices of things like furniture to rise rapidly.
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Structure is likely the biggest component of your insurance policy in a total loss. This part of your policy pays to rebuild the structure of your home or repair the parts that have been damaged.
Your home insurance is based on the construction costs of rebuilding your home rather than the market value. While it is unaffected by rising market real estate prices, construction costs have also been on the rise.
The best way to check if your insurance coverage is enough is to get a quote for construction costs in your area and compare the result to your coverage limit. Talk to your insurer about increasing your coverage if what you have will be insufficient in the event of a total loss.