5 Thing To Know About Homeowners Insurance

Insurance Costs Held in Escrow

Homeowners insurance is critical, and it's a requirement by the mortgage company to carry a mortgage, and rightly so. If something were to happen to your home and it was destroyed completely, you would still be obligated to pay for the outstanding balance owed to the mortgage company.

Many lenders require that you pay a portion of the taxes and insurance upfront so they can make sure that those bills get paid. These expenses are collected as part of your lending closing costs and are held in an escrow account, or sometimes referred to an impound account. Your mortgage servicer will manage the escrow account and pay these bills on your behalf. Expect your total monthly payment to change when taxes and insurance costs go up.

Market Value vs. Replacement Cost

Market value is the amount a buyer would pay for the home and land in its current condition. It is influenced by factors such as proximity to good schools, local crime statistics, and the availability of similar homes.

Replacement cost is the cost to replace the entire home. When you insure your home for its estimated replacement value, your insurer will reimburse you for the cost of rebuilding your home, subject to policy limitations, based on the size and structure of the home that was lost.

Replacement cost value (RCV) is not:

The market value of the home
The home's purchase price
The cost of the land
The outstanding amount of any mortgage

The most straightforward RCV calculation formula for estimating your home's replacement cost value is to multiply your home's square footage by the average square foot cost to rebuild a home in your area.

What You Need To Know

Know about exclusions to coverage. For example, most insurance policies do not cover flood or earthquake damage as a standard item. These types of coverage must be bought separately.
Know about dollar limitations on claims. Even if you are covered for a risk, there may be a limit on how much the insurer will pay. For example, many policies limit the amount paid for stolen jewelry unless items are insured separately.
Know the replacement cost. If your home is destroyed you’ll receive money to replace it only to the maximum of your coverage, so be sure your insurance is sufficient. This means that if your home is insured for $150,000 and it costs $180,000 to replace it, you’ll only receive $150,000.
Know the actual cash value. If you chose not to replace your home when it’s destroyed, you’ll receive replacement cost, less depreciation. This is called actual cash value.
Know the liability. Generally your homeowner’s insurance covers you for accidents that happen to other people on your property, including medical care, court costs, and awards by the court. However, there is usually an upper limit to the amount of coverage provided. Be sure that it’s sufficient if you have significant assets.

Umbrella Insurance

In addition to a homeowners insurance policy, an umbrella policy provides vital coverage for people who own a home, an auto mobile, and/or a boat. If you cause an accident, do you have enough coverage from your current policies to protect you? With limited coverage availability on your homeowners, car, and watercraft insurance, these policies can be easily exhausted if you are slapped with a lawsuit. Umbrella policies are designed to give added liability to the limits of home, auto, and boat insurance coverages. An umbrella policy will kick-in when these resources have been depleted and are not able to completely cover the costs of your accident.