What is Home Insurance? 

Home insurance, or homeowners insurance, is a type of property insurance that covers private residences. Home insurance provides you with financial protection in the event of a disaster or an accident involving your home. These accidents can range from hail damage and fires to someone getting injured on your property. However, don’t count on home insurance to cover general wear and tear or things like rodent and insect damage to your home. Home insurance can also protect your belongings and furnishings inside your home, including clothing, electronics, and appliances. 

Is Home Insurance a Requirement? 

Home insurance can help protect you from great financial loss, and while it is legal not to have home insurance, banks and lenders will require it. Lenders require home insurance because they want to ensure that the property they have an investment in is protected against damage. They also want to ensure that you, as the borrower, would have a way to pay off your mortgage in the event that the home is destroyed. So, unless you are paying for your home upfront in cash, you may want to invest in home insurance.         

What Are My Home Insurance Options?  

Like most other types of insurance, all home insurance plans are not the same. There are several types of home insurance plans, and like all insurance, the less you pay, typically the less coverage you receive.

Three Tiers of Homeowners Insurance Coverage

Essentially, there are three tiers of coverage, ranging from basic protection to plans that will protect against inflation. 

1. Actual Cash Value

This level of protection includes the cost of the house plus the cost of your belongings after deducting depreciation (how much your items are currently worth, not how much you paid for them). This protection level is likely to be seen in your cheaper and less inclusive home insurance plans.   

2. Replacement Cost

This level of protection covers the actual cash value of your home and belongings without factoring in depreciation, allowing you to rebuild your home to its original value. This is the most common and the most recommended coverage option, as it allows the policyholder to secure a living situation that closely resembles their previous one in event of a disaster. 

3. Guaranteed Replacement Cost (Also Called Extended Replacement Cost)

This level of protection covers the cost of repairing or rebuilding your home, even if it’s more than the policy limit. This coverage is essentially an inflation buffer and is ideal in a fluctuating market. These policies will absorb any increases in replacement costs and will give the homeowner a cushion in case construction prices increase. 

For example, if you live in a region that has been struck by a hurricane, the construction and material costs are likely going to increase in the area due to the demand for home reconstruction. A guaranteed replacement cost policy will cover your home as it was before the storm and will account for the increase in construction costs, even if it is worth more than the value of your home. 

These plans are the most costly, however, they are the most extensive when it comes to coverage. If you live in a natural-disaster-prone area, you may want to consider a guaranteed replacement cost policy. 

More to Consider  

eHome considers home insurance an important part of the long-term responsibility that comes with being a homeowner, as well as an important part of money management and preparing for unforeseen expenses. 

In the mood to keep learning right now? Check out one of our money management  courses to learn more about how budgeting for the cost of homeowner’s insurance and more!