How Does Home Insurance Work?

Home insurance is one of the most important investments every homeowner can make. As your home is one of your greatest assets, it’s imperative to ensure that you take the time needed to choose the best home insurance that will adequately protect your assets during times of catastrophe or theft. Home insurance protects your home and property from theft, flood, fire, hurricanes, blizzards or other natural disasters. It’s important to understand that many mortgage companies will not agree to a mortgage unless there is proof of homeowners insurance. Selecting insurance to protect your home is just as important as the home buying process itself.

Home insurance works by ensuring that should any damage come to your home or property, you will be reimbursed for the damage. The first and most important aspect of home owners insurance is to select coverage that will cover the cost to repair or rebuild your home if damaged by natural disasters or catastrophes as described in your policy. It’s important to understand that you’ll need to know the full value of your home; however, for insurance costs and purposes, you’ll need an estimate of how much it will cost to rebuild your home, based upon current building rates and fees. Choose your insurance based upon costs to rebuild, not the value of your home. It’s also important to realize that you shouldn’t include the value of your land when determining rebuilding costs for your home.

It isn’t just the external structure or outside of your home that is protected through home insurance either. Floods, hurricanes, tornadoes and theft can destroy your home’s furnishings, jewelry, collectibles and other possessions. Most insurance policies will not cover these items 100% but rather will reimburse you up to 70% for their value. For insurance purposes, you should have photos taken of your furniture, electronics, jewelry and collectibles along with appraisals. Keep these photos and documents in a safety deposit box, such as at your banking institution, in order to ensure their safety should your home become damaged. These can easily be retrieved and used for claims purposes should you need to file for loss of property or personal items.

In addition to replacing or rebuilding your home and personal belongings, home insurance also protects you from personal liability. Third party property damage or bodily injury or death that occurs in your home or on your property can cause financial ruin and lead to numerous legal troubles. Home insurance protects homeowners from court costs and damages awarded to those parties involved. Homeowners should pay careful consideration to the amounts they set for this coverage. Most financial experts recommend having at least $300,000 in liability protection. You may find that an umbrella policy is the best policy as it usually includes higher compensation and payouts.

When someone becomes displaced due to a disaster or catastrophe you’ll find that there are insurance provisions that will cover the cost of expenses associated with temporary stays outside of your residence. This can include hotel stays, restaurant bills and other expenses associated with displacement. Make certain that you include this coverage when you initially purchase your insurance policy and understand what your policy allows.

Those choosing home insurance will need to determine between three payouts provided by the insurance. These include actual cash value, guaranteed replacement costs and the total replacement cost. An actual cash value policy ensures that a home and possibly possessions are replaced with a deduction for depreciation. Guaranteed replacement cost will pay for you to rebuild your home to the same manner it was before it was destroyed and replacement cost will allow you to replace your home and possessions without taking out a deduction for depreciation.

Home insurance is a vitally important component to being a wise homeowner, choose your insurance carefully.

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