Nobody who buys home insurance coverage wants to use it. It is a requirement to have and gives you some peace of mind, but the reality that you are faced with a loss warranting opening a claim is devastating. Ideally, a natural disaster doesn’t occur anywhere near your home. However, climate change is increasing the frequency of fires and flooding, and you are wise to understand their home insurance coverage in detail.
By the time a flood or fire strikes your home, it’ll be too late to update your policy. Reviewing it now can help ensure it is accurate and that it reflects your current needs and any growing risks that may apply specifically to your home region. With the constantly changing market and building costs, you may want to ensure that your structural coverage is not too low.
Parents need money for all of their children’s needs, and being out of pocket hundreds of thousands of dollars because your insurance claim isn’t processed or doesn’t sufficiently cover fire-related damage is not an option. Having the right policy can be the difference between restoring your home and needing to move on from the property, which is why reviewing your insurance policy before you need it is so important.
While reviewing the policy, what are the important factors to look for and consider? Here are a few considerations that can help you understand better.
Is Your Deductible Big Enough?
Many homeowners hope that a home insurance policy with a lower premium is enough to get by. Naturally, the lower the premium, the easier it will be to fit into your budget. However, this calculation flips on its head after a catastrophic event like a fire. If you cannot afford your deductible, you may go into debt after a loss occurs.
For clarity, let’s review the terminology. The deductible is the amount a homeowner needs to pay before the insurance policy begins to cover the losses. If your deductible is set very high, you won’t be compensated for damage to your personal belongings until after that amount is reached.
For example, in a total loss fire, you could lose personal belongings worth tens of thousands of dollars, but if your deductible is too high, you’ll have to bear most of that loss yourself before the insurance kicks in.
Review your current policy’s deductibles alongside your emergency savings fund and make any adjustments you think are beneficial. Remember, there could be different deductibles for different types of coverage.
Are You Covered for Major Risks?
Usually, home insurance policies cover basic risks like fire, liability, and windstorms. Some homes are in regions prone to certain types of natural disasters, which may fall outside of your ordinary policy and require you to purchase additional protections.
If so, you should consider getting add-on protections that cover these additional risks. You don’t want to get caught totally unprepared if the insurance company is within its rights to not cover any of the costs because your basic policy is not broad enough to cover the loss.
Some of the most common forms of add-on coverage include:
- Sewer backup: municipal infrastructure can get overwhelmed by water and flood homes through showers, toilets, and drains.
- Overland flooding: when an overflowing body of water enters your home from the surface (in contrast to flooding caused by rains).
- Earthquakes: most policies don’t include them, even in areas prone to them.
- Extra coverage for valuables: some expensive jewelry or fine art may require additional coverage.
Local flood maps can help you determine if your property is at risk of flooding.
Understanding Actual Cash Value vs Replacement Cost
Knowing the difference between Actual Cash Value and Replacement Cost is essential, as it’s one of the most important aspects of your insurance policy. Both can work in the right situation, but you need to ensure you have the right coverage for you. Replacement Cost coverage will cost more, but it will provide you with better coverage.
When you opt for Actual Cash Value coverage, your losses will be covered based on the current value of the items lost, factoring in things like wear and tear and structural elements like flooring and roofing. It also takes into account depreciation for things like clothes and electronics.
In other words, Actual Cash Value reflects the value of what was damaged or destroyed when it was damaged or destroyed, not what you actually paid for it, which could be a much higher cost. Electronics tend to depreciate quickly because technology evolves very quickly. You might not even be able to give away a big-screen TV that cost $500 in 2000 for free in 2024.
Actual Cash Value is one of the common reasons people are upset with their claim’s results.
In contrast, Replacement Cost does not factor in how your lost personal belongings have depreciated. The insurance company will pay out the present-day equivalent cost until the limit of your policy has been reached. This may be more or less than what you paid for it.
For example, if a living room chair you bought years ago for $800 now costs $1,000 due to rising costs and inflation, the insurance company will pay $1,000 to purchase the exact same chair. If the cost has lowered to $800 because the model is outdated and the company has newer ones, that’s the amount the insurance company will pay out.
Having an insurance lawyer by your side to help deal with the more complicated claims can be an excellent way to ensure you aren’t disappointed by the amount in the claim. They also help make the process of filing the claim smoother, which you will especially appreciate after your home suffers damage from a fire.
Whether you pick Actual Cash Value or Replacement Cost, your insurance lawyer will help maximize your claim and take much of the pressure off. The right option for you may depend on your current finances, the value of your belongings, and other unique factors. If you realize only too late that you’ve picked the wrong option, the mistake can be costly. It’s better to review the policy now and make the change while you still can because afterward, it’ll be too late.
Providing a safe home for children means more than baby-proofing your house, minimizing physical dangers, or ensuring they’re in a warm and loving environment. Sound financial planning that amply covers your family in the event of a disaster like a fire or flood is an important form of safety, so review your insurance policy carefully and make sure you’re covered.
