By the time your home has gone through a fire, flooding, or a natural disaster, it’s too late to update your insurance policy. That’s why it is so important for homeowners to review their home insurance policy to make sure it’s updated to reflect the realities of the property, where they are at in their life and the growing risks that may exist where they live.
Should something happen, you can wind up paying hundreds of thousands of dollars on your own if your insurance claim is not processed or you are underinsured. The right policy can mean the difference between rebuilding your home as it was and accepting a compromise or even having to walk away from the property.
The perfect time to review your insurance is when you renew your policy, but what should you be looking for to make sure your family is covered? These are the factors you should look at to make sure you avoid some of the most common problems with home fire insurance.
How Big Is Your Deductible?
Homeowners looking to make their insurance fit their budget may be tempted by taking out a policy with a lower premium. But if you cannot afford your deductible, you may wind up having to go into debt after a loss happens.
Your deductible is the amount you have to pay before your insurance policy covers losses. For example, in a total loss fire, you may lose tens of thousands of dollars in personal belongings, but you may still have to pay a high deductible before the insurance kicks in. A high deductible could be up to several thousands of dollars.
Compare the deductibles in your insurance policy to your emergency savings fund, and adjust your policy accordingly. Keep in mind that there are often separate deductibles for different types of coverage.
You Are Covered for Major Risks
Most home insurance policies cover basics like fire, liability, and wind storms. Depending on where you live, your home may face other risks that are not covered under your basic insurance policy. There may be add-on coverages that you should look into getting to protect against these additional risks. Otherwise, you may find that the insurance company will not cover any of the costs of repairing your home.
Common add-on coverages include:
- Overland flooding: when a body of water overflows and water enters your home from the surface.
- Sewer backup: when municipal infrastructure is overwhelmed by water and your home floods through drains, toilets, showers, etc.
- Earthquake: not usually included in most policies, even in earthquake-prone areas.
- Extra coverage for personal items: some valuable items may need additional coverage, such as jewellery or fine art.
If you aren’t sure whether your home is at risk for flooding, see if you can find local flood maps that should lay out which properties in your neighborhood are at risk.
Actual Cash Value vs Replacement Cost
These two terms are some of the most important in your insurance policy. If you are not sure which one of these applies to your coverage, it is worth finding out sooner than later so that you can prepare accordingly.
When you get Actual Cash Value coverage, your losses are covered only up to the real value of lost belongings and construction materials. This takes into account wear and tear on structural elements like your roof or flooring, as well as the depreciation of personal belongings, such as electronics and clothes.
For example, if you lost a $1,000 laptop that was three years old, it might only be worth $600 now, depending on how long the insurance company says a laptop has a useful life. The insurance company would only pay out $600. ACV coverage is one of the most common reasons homeowners are disappointed with the results of their claim.
Replacement Cost does not apply depreciation to your losses. Instead, the insurance company will pay out the present-day cost to replace what you lost, up to the limit outlined in your policy.
If you lost a couch that cost $1,000 when you purchased it, but due to inflation and rising costs, the exact same model now costs $1,300, the insurance company would pay out the funds to re-purchase the same model. If, however, the price has gone down to $800 because the model is older, the insurance company would pay out $800.
Having the wrong coverage can be a costly mistake, and once a loss occurs, it is too late to fix it. Review your insurance policy now and keep in mind the areas of concern described above. Adjusting your policy now can save you money and make sure you can rebuild your home after a fire or a natural disaster.