Your home is most likely your largest and most expensive asset. But if you are like I was, you may have just purchased the cheapest policy you could find to insure it. If you would like to learn more about one of the most insurance policies you will own, keep reading as I review some coverages and concepts.
Coverage A or Dwelling Coverage
This is perhaps the most confusing coverage for many people when they are shopping for insurance, as the amount never seems to make sense. Why do I need to insure my house for so much more than I paid for it? Isn’t that the real value?
Not necessarily. This is going to be the first introduction of one of the most important concepts in Homeowners Insurance: Actual Cash Value vs. Replacement Cost.
With an Actual Cash Value Policy, your home will be covered for what it is currently worth, not what it would cost to rebuild it. And this amount is subject to depreciation meaning that the value of the home is lowered by the age of the property and its components. If you have a large amount of damage to your home from a fire or storm, the Actual Cash Value Policy may not have enough coverage available to rebuild or repair your home.
With a Replacement Cost Policy the Dwelling coverage is calculated based on what the insurance company believes it would cost to completely rebuild the property in the event of a major loss. This amount is almost always higher than the sales price of the home (the Dwelling coverage is for the structure itself and does not include any land and property included in the sale, so the sale price in some circumstances may be higher) so it may seem frustrating. But it does cost more to build a home on an existing site than it does to build a new home on a vacant lot.
The Dwelling Coverage should be reviewed periodically to be sure that it keeps up with inflation so that you are not left short in the event of a loss ten years down the road. Some insurance companies build an inflation index into the renewal of the policy to increase your dwelling coverage automatically. Also, some companies will include an additional percentage of extended coverage in their policy to help protect the insured. The current Farmers Insurance home program in Illinois and Wisconsin includes the options for 110%, 150% and Guaranteed Replacement Cost coverage.
Coverage B or Separate Structures
If you have a shed, a detached garage or a pole barn these structures are not included in your Dwelling Coverage. They are instead considered Separate Structures and are covered under a different coverage in your home policy. This coverage is generally calculated as a percentage of your Dwelling Coverage but it should be reviewed to be sure that any structures not attached to your home are covered. If you live on a property with multiple outbuildings be sure to let your agent know so that the coverage is set up correctly for you.
Coverage C or Personal Property
If you can pick something up in your home and take it with you and it is not attached to the home, it is generally considered Personal Property. With Personal Property we again have to be careful with the Actual Cash Value versus Replacement Cost Coverage. Depreciation on personal property is sometimes very extreme, especially for items such as home entertainment or computer equipment. With an Actual Cash Value policy, the 70″ tv that you paid $2000 for three years ago may only be worth $400 because of depreciation. With a Replacement Cost policy, that tv is worth the price of a similar 70″ tv at current cost. This is the option that I always recommend to my clients.
Coverage D or Loss of Use
If your home is damaged by a fire or storm, you may be unable to live in it while it is being repaired. This is where your Loss of Use coverage kicks in. If you purchase this coverage your insurance company will pay up to the covered amount for you to rent a living space for you and your family to live in for a specified period. With the Farmers Insurance home policy, this is calculated as a percentage of your dwelling coverage and is generally more than sufficient to rent a similar home while yours is being repaired.
Coverage E or Personal Liability
If someone is injured on your property, you may be held liable for damages. Your Personal Liability coverage may then take effect provided it was not an intentional act. When you purchase your Homeowners Policy, check to see the price difference for upgrading this coverage. You might be surprised at how little it costs to increase this coverage to $1 million or higher.
These are some of the main components of a Homeowners Policy. There are too many coverages and circumstances to include here, so if you have any questions, please call me at 815-566-4151 or email me at ccottrell@farmersagent.com and I will be happy to help you.