When you purchase a home, you will be required to have insurance. Not only will having insurance protect you, the homeowner, should your home be damaged, but it will also help protect the lender. After all, they do have an investment in your home and if it’s destroyed and you don’t have insurance, they will also lose a lot of money.
The Basics of Homeowners Insurance
Homeowners insurance is designed to protect your home against damages to the home, or loss of possessions in the home. It covers many scenarios that may happen that can damage your home such as:
- Natural disasters
- Acts of war
If you live in an area that is prone to floods or earthquakes, it is a good idea to purchase an extra policy, as flooding is typically not covered in homeowners insurance. There are several different levels of homeowners insurance:
- Actual Cash Value
- Replacement Cost
- Guaranteed Cost
Actual Value vs Replacement Value
Actual cash value is “the amount equal to the replacement cost minus depreciation of damaged or stolen property.” You will be reimbursed with the estimated value of your losses.
On the other hand, replacement cost is the cost of what you have to pay when you replace an asset with a similar asset at the current value. For example, if you buy a computer worth 500 dollars and it is stolen, you can replace it for what it is currently worth on the market.
Guaranteed Replacement Cost
The last type of homeowner’s insurance, is called guaranteed replacement cost, or extended replacement cost. This policy guarantees that your home will be returned to the state it was before the damage was incurred. Guaranteed replacement cost is considered the highest level of protection for your home and assets.
What Happens If I Don’t Get Homeowner’s Insurance?
It’s not recommended to forgo homeowners insurance. Not only does it cover your home and possessions, but it also can provide liability protection should someone get injured on your property. That way, if you are sued, you have some money to defend yourself and prevent the court from taking your property or seizing some of your savings.