Home Insurance is not “Apples to Apples” 3 mins

A vast majority of people who sign up for Home Insurance are not fully aware of its details. It’s mistakenly believed by many that all home insurance policies are the same. While it’s true that basic coverages provided under all home insurance policies are the same, the specifics of the policies differ greatly. While signing up for homeowners’ insurance, people are over-scrupulous with the prices and often end up excluding many major coverages from their policy.

When it comes to insurance, affordability matters a lot. You need to be thoroughly apprised of all the details of the insurance you are signing up for. If you are utterly apprised of all the coverages and pricing models, you can easily select a home insurance policy that suits your needs.

It should be kept in mind that homeowners’ insurance is a multiple-line insurance policy. It has an indivisible premium for all coverages. This means that you will have to pay a single premium for all the coverages included in your homeowners’ insurance policy.

The coverages included varying from policy to policy. Different home insurance policies cannot really be compared. One home insurance policy is not identical to the other home insurance policy like an apple is identical to another apple. The ‘apples to apples’ analogy do not apply here. If your neighbor’s home insurance policy covers damages caused by household pets, it doesn’t mean you’ll be provided with the same coverage regardless of whether it’s stipulated in your policy or not.

More coverages come with higher premiums. Higher premiums may also come with lower deductibles that are basically the payments you make out-of-pocket before the insurance company pays for any damages when faced with a covered loss. Deductibles are paid when the amount required to compensate for the damages is not within the bounds of your coverage. It means that you have suffered more loss than your home insurance policy can compensate for. Coverage limits also differ from policy to policy. For example, you and your neighbor both suffer some kind of loss that costs you both equally. Now, if your coverage limit is higher than your neighbor's, you’ll get more compensation than your neighbor.

The basic factor that makes your home insurance policy different from your neighbor’s home insurance policy is the cost. The prices of homeowners’ insurance policies are determined by a variety of factors including location, coverage types, amount of insurance, etc. The amount of insurance is typically based on the replacement cost of the house, that is the estimated cost required to rebuild the house. Homeowners’ Insurance comes in two forms:

  1. Replacement Cost
  2. Actual Cash Value

One of the things that makes the ‘apples to apples’ implausible in the case of homeowners’ insurance is the way you will get covered in face of a loss. If you are compensated on the basis of replacement cost, you will be paid the exact amount required to replace or rebuild your house at the present time. It’s one of the most common methods of determining the cost of an insured property. Replacement Cost Health Insurance does not take depreciation into account and therefore you are compensated with an amount required to replace your house at a pre-loss condition. However, it must be noted that the replacement cost of your house is not necessarily the market value of your house. If you buy a Replacement Cost Home Insurance, certain stipulations may be incorporated in your contract to prevent over-insurance that typically results in insurance fraud like arson.

If you buy an Actual Cash Value Home Insurance, you will be compensated on the basis of the actual cash value of your house. You are basically paid an amount equal to the replacement cost of your house minus the depreciation resulted due to general wear and tear. Actual Cash Value is always less than the replacement cost. A Replacement Cost Home Insurance seems very fascinating but it comes with higher premiums.

There are other factors as well that contribute to the lack of plausibility of the ‘apples to apples’ analogy for home insurance policies. For example, if your house is located near a fire station, you may be charged higher premiums as your house is more likely to catch fire due to its proximity to the station. Similarly, you may be charged less if your house has wind mitigation measures. Insurance payments are commonly made annually. However, this may also differ from policy to policy.

The coverages provided by different homeowners’ insurance policies are different as well. At times, two policies have the exact same cost but still incorporate different coverages. It must be remembered that whatever is stipulated in your insurance contract is what you agreed to when you purchased the insurance. Home Insurance policies offer coverages on the basis of ‘open perils’ and ‘named’ perils. If you buy a ‘named-peril policy, you will be covered for a loss particularly mentioned in your insurance agreement. If the peril is not listed, coverage will not be provided to you. An ‘open peril policy, on the other hand, provides coverage for all the losses except the ones specifically excluded from your insurance contract.

Named perils and open perils, both differ from policy to policy. However, under a standard homeowners’ insurance policy, basic named perils are the following:

  • Lightning Bolts
  • Civil Disturbances
  • Smoke
  • Vandalism
  • Hailstorm
  • Windstorm
  • Fire
  • Explosion
  • Aircraft Collision
  • Vehicle Collision

You can supplement your policy with extra coverages by paying additional premiums.  A basic named-peril policy is the least comprehensive homeowners’ insurance. A broad named-peril home insurance policy adds six more perils to the list. This policy is specifically designed to cover the most common types of property damages. A broad named-peril policy includes all basic named perils along with the following:

  • Burglary
  • Artificially-produced electricity
  • Accidental Water Damage like Sewer Backups
  • Plumbing Freezing
  • Weight of Icicles or other forms of snow
  • Falling Objects like Tree Trunks etc.

You can also purchase an all-risk home insurance policy as it is the most inclusive one. Special policies cover all losses except the ones that are specifically excluded from your insurance contract. In a special all-risk home insurance policy, all the perils that are not listed are covered. Perils that are generally excluded are earthquakes, nuclear hazards, floods, etc. However, there are separate insurance policies to cover the damages caused by such perils.

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