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Understand the Basics of Your Home Insurance

November 15, 2010

Whether moving into a new home, or considering changing insurance coverage, understanding the basics of home insurance is crucial in helping you make the right decisions. You need to know exactly what each home insurance policy covers before deciding on which home insurance quote best suits your needs.

Types of Insurance Policies

1.   Comprehensive: As the most extensive home insurance option, this covers your home and its contents for the most common types of loss. Watch for specific losses that are excluded, and make sure you’re comfortable with the extent of the coverage. You may be able to purchase additional insurance to cover these losses, and there may certain risks against which no insurance is offered.

2.   Basic or Named Perils Coverage: This type of home insurance names the types of loss that your home and contents are covered for. This policy will include a specific list of perils, so check it to ensure it includes the types of loss you want and need to be insured against, and be prepared to cover the cost of loss for all other perils yourself.

3.   Broad Policy: A combination of Comprehensive and Basic coverage, this policy is lower risk than Basic Coverage, but less expensive than the Comprehensive package. This typically includes comprehensive coverage on high value items (like your home) and basic coverage on lower value items (like outbuildings or the contents of your home).

Understanding the types of policies and their benefits and risks is important, but it’s also important to make sure you understand the terms in the policy, so that you can fully appreciate what you are insured against and what you are not. The following are common terms in home insurance policies which will help you to understand your coverage:

Actual Cash Value

This is a type of value determination that dictates how much money you will receive when you have to make a claim. Actual cash value refers to an item’s original value minus depreciation. This means that for expensive items that have been purchased a number of years ago, you may be disappointed with your payout in the event of a claim. You should keep this in mind when purchasing insurance, and when assessing whether to make a claim or not in the event of damage or theft. Actual Cash Value coverage is standard with most cheap home insurance policies; however, you can request a home insurance quote for policies that include replacement value coverage instead. Your premiums will likely be higher, but in the event of a claim you will be entitled to the value to replace the items instead of their current, depreciated value.

Detached Buildings

If you have additional buildings on your property, then a standard home insurance policy will usually cover them for up to 10% of the value of the whole policy. If your outbuildings and their contents are worth more, add additional coverage to insure them for their full replacement amount.

Personal Liability Coverage

Also referred to as Third-Party coverage, this type of insurance protects you against financial loss should you be found liable for injuring a third party, or damaging their property – whether you are at home, or anywhere else in the world. For example, you could find yourself making a claim against this coverage in the case that someone slips or falls on your property, if your child does damage to someone else’s home (intentionally or unintentionally), or if your dog bites someone.

Additional Living Expenses

Coverage for living expenses helps to protect you from the costs associated with living somewhere else in the event of a loss while repairs are being made to your home. This could be due to fire, smoke, water damage, etc – as long as the risk that caused the damage is covered by your insurance policy. Usually home insurance policies will provide a per diem for food and lodging for a specified period of time, but can also cover expenses such as moving costs and aim to keep you and your family living in the lifestyle which they are accustom to.

When you compare insurance quotes for any type of insurance it is important to know exactly what you are covered for, and for how much – but this is especially important for your home. Property can vary substantially between home owners, and policies and coverage can vary just as much by insurer. By taking the time to compare each policy you can choose the most affordable coverage that insures you for the protection you need, and you won’t have any surprises when it’s time to make a claim.