There are many details to consider when purchasing a home insurance policy. Some are obvious, like how much coverage you need for your dwelling, personal property and personal liability. Other policy details aren’t as obvious, yet still important.
Your Policy’s Deductible
The deductible on a home insurance policy is the out-of-pocket amount that you’re responsible for before your insurance kicks in. Many home insurance policies carry a $1,000 deductible. That means if you file a claim involving damages of $5,000, you would be responsible for the initial $1,000 and your insurance company would pay the remaining $4,000.
The amount of your deductible directly affects your premium. Generally, the higher your deductible, the lower your premium. For example, raising your deductible from $1,000 to $2,000 could lower your premium, while lowering your deductible tends to raise your premium.
Exclusions are specific types of losses or damages that aren’t covered by your insurance policy. Most home insurance policies contain the same or similar exclusions. Examples include damage caused by flood, earthquakes, wear and tear, and damage that is caused intentionally.
It’s a good idea to read the exclusions on your policy to know which losses or damages aren’t covered. Fortunately, you may be able to buy coverage for those things separately.
- Purchase a flood insurance policy through FEMA’s National Flood Insurance Program (NFIP), or
- Purchase a flood insurance policy through a private provider, such as Neptune Flood.
Replacement Cost vs. Actual Cash Value
If your property or personal belongings are damaged or stolen due to a covered loss, your insurance company will pay to repair or replace the damage. But how much they pay out depends on whether your policy provides for replacement cost value or actual cash value. The difference is important:
- Replacement cost value – Pays you to replace the item with a new, similar item
- Actual cash value – Pays you what the item is worth at the time of the loss
Let’s say the sofa you purchased for $1,000 several years ago is damaged in a fire. If your policy provides for actual cash value, you’ll receive what your sofa was worth at the time of the fire—which may only be $500 due to depreciation.
If you have replacement cost value, you’ll receive the value of a new sofa of the same size and quality. In this case, you may receive $1,200 due to inflation.