We have written a lot on car insurance and the questions and concerns that come with it, but we also want to provide our readers with valuable insurance information that spans beyond just their vehicles. Homeowners insurance can seem like a murky area, with lots of pitches being thrown your way, and not nearly enough clarity. A big item of confusion that pops up in (any kinds of) insurance, is the terminology used to describe what an issuing company will or won’t cover. Things that seem to be pretty straight forward can end up meaning the difference between getting an item back, or having to come out of pocket for the full cost. Below are four of the most frequently used terms that people encounter in homeowners insurance, and our attempt to shed some light on them for you:
I see most policies make a differentiation between “actual cash value” and “replacement cost” – can you clarify the difference?
Certainly! With your homeowners policy, you have these options when it comes to how reimbursement is handled. Each option comes with its own set of premium commitment that only you can determine, based on your lifestyle and income bracket. The term “actual cash value” comes into play when the policyholder is willing to accept a percentage of the value of the damaged/stolen item(s). “Replacement cost” however, offers the policyholder the ability to replace the item, by giving monies to the amount determined by the type of article, and comparative pricing. Again, they seem similar enough, but it behooves you to ask for details from your issuing company as per how the value of the item is determined, and what source-standard is being used to present you with a price they are willing to pay out.
Two other terms that I see frequently in policies are “named perils” and “all risks” – which is better to have if I’m on a modest budget to begin with?
Without being too metaphysical, it’s always best to approach homeowners insurance policy decisions after you’ve thoroughly assessed your lifestyle, current earning situation and your living situation. For many people, homeowners insurance and the quality of this kind of insurance that they are willing to commit to, is determined by the state of their lives at this very moment. But if things are honky dory, your go-to mindset may automatically be “well I don’t need THAT much insurance…” Famous last words, people. As difficult as it may be, you have to assess your insurance needs based on plausible “what ifs”. If you travel a lot and work away from home, it may seem like your house and belongings don’t need full coverage, but did you know that homes that are unoccupied for predictable long stretches, are the most prone to break-ins and vandalism? Specific to this question, “named perils” identifies a set list of possible occurrences that your insurance provider will cover. No more, no less.
It may seem easy and affordable, and for many people, it’s the best pick. But an “all risks” policy absorbs losses that are due to any peril, unless otherwise stated (and they are always stated – so if you don’t know what they are, ask your agent for clarification!). It may not be immediately apparent than an “all risks” policy is the best for you, but with some foresight, you may determine that it is cheaper to have your home and valuables insured, rather than have to lose them and pay out of pocket to replace them all on your own.
BOTTOM LINE: Read the fine print, highlight what you are unclear about and get your agent to work for you and explain what various terms may mean to your policy type!
Read our article on the 5 steps to switching car insurance and understand what it takes to get a better rate.