Before meeting with your agent, there are some basic points of understanding you will want to have when discussing insurance options.
One of the first questions to ask is “do I know how much my home is worth”?
There are many ways to look at your home’s value. One is to examine the price you paid for the home. This works best if you purchased the home within the last two years. If you have owned your home for a longer period, a better method would be to review your tax assessment and comparable sales in your area.
When discussing insurance coverage, you should be familiar with two terms. The first is replacement cost and the second is actual cash value.
When discussing the real cost of rebuilding your home brick by brick, you are discussing replacement cost. It is meant to represent the actual real dollar cost of rebuilding your current home exactly as it stands today. This is different from market value, as the market value can be much higher or much lower than replacement cost due to the age of the home, or the location of the property. For example, highly desirable lakefront properties may have a market value of millions of dollars, but may have a house that cost only $250,000 to build. Conversely, if your home is in an economically depressed area, the replacement cost could far exceed the market value.
The true definition of actual cash value is replacement cost minus depreciation. Depreciation is a factor that reduces the value based on age and obsolescence. This is often much closer to market value, but there are several methods of determining actual cash value. If you are opting for an actual cash value policy, be aware that any losses that you have will be paid based on the replacement cost of the repair, minus depreciation.
Another topic of discussion for your agent is the types of losses that are covered. Some policies will cover a list of specifically named perils, or causes of loss. If you have damage that is not caused by one of those listed causes, there is no coverage and your claim will be denied. An alternative is a more all-encompassing coverage that has a list of exclusions instead of a list of perils. With this policy, a loss is covered unless it is caused by one of the excluded causes of loss. This type of policy covers more types of claims and is typically known as “Broad Form Coverage.”
Once you have nailed down these items, it pays to take a careful look at the contents of your home. This means furniture, clothing, toys, exercise equipment, books, food, and generally anything that is not attached to the house. Taking a full house inventory can be a laborious process, but it will ensure that you have adequate coverage. Most homeowner’s policies will allow for 80% of the building value as a value to insure all of your personal property. This is usually adequate, but be sure you are familiar with the special limits of liability for items such as cash, jewelry, guns, or watercraft.
Be sure to address the size of your deductible with your agent as well. The size of your deductible could have a significant impact on your premiums.