4 Things You Need to Understand About How Homeowner's Insurance Works

Posted on: 24 June 2020

It is not enough for you to have homeowner's insurance; you also need to understand your insurance coverage. Understanding your insurance coverage will allow you to properly prepare financially for an insurance claim and will allow you to make smarter decisions about the type of coverage you have.

#1: Your Premium

Your premium is the amount you are expected to pay for your coverage. With homeowner's insurance, your premium rate is locked for the year. You can either pay for your homeowner's insurance coverage on a monthly, quarterly, or annual basis, depending on how your coverage is set-up.

The cost of your premium depends upon a large variety of factors, such as the crime rate in your area, the age of your home, and the type and level of coverage you select for your policy.

#2: The Deductible

When you set-up your premium, you are also going to need to set a deductible amount. This is the money you will be expected to pay out-of-pocket before your insurance will start to provide coverage.

In some cases, you must pay the deductible each time you make a claim. For example, if you file two claims in a year, you will have to pay the full deductible amount twice. It is per-incident deductible, not a per-year deductible.

As a rule of thumb, a higher deductible will help lower the cost of your premium, whereas a lower deductible will increase the cost of your premium. You can adjust your deductible amount based on your ability to pay the deductible each year when you start a new policy.

#3: Policy Limits

When you look at your insurance coverage, be sure to pay close attention to the limits on your coverage. The limits will vary for structural coverage, personal belongings, liability, and additional living expenses.

Carefully examine the coverage limits for each of these areas of your policy, and make sure the limits would cover your needs if you had to use your insurance. If the coverage limits will not cover your needs, increase them. Keep in mind that increasing your coverage limits will more than likely result in an increase in your premium.

#4: Claim Settlement Process

When it comes to how your coverage limits are met, it depends on the claim settlement process for your policy. This process is the manner in which your insurance company determines payouts. Here are a few options.

Actual cash value is a claims settlement process where you are given the value of the item that needs to be replaced, minus the depreciation value. For example, if someone stole the 3-year old 4K television that you bought for $800, the insurance would take the value $800, and minus the perceived depreciation of the item, for example, $150, and give you $650 for the item.

The replacement cost value is another settlement process. In this case, you are given money to replace damaged property with something similar. So, if your 3-year old 4K television was stolen, you would be given the money to go out and buy a similar 4K television.

If you have any more questions about how your homeowners' insurance coverage works, reach out to your insurance agent.