Virtually all mortgage lenders require homeowners insurance. Even if you own your home outright, it can provide financial protection and peace of mind. Before buying or updating your home insurance policy, it's important to familiarize yourself with a few important terms. It can help you better understand your policy and make more informed decisions. Here are 13 home insurance terms you need to know.
1. Premium
Your home insurance premium, which is typically due monthly or annually, is the amount you pay to keep your home insurance policy active. If you have an escrow account, your premium might be folded into your monthly mortgage payment. In this case, your mortgage lender will pay your insurance premiums on your behalf.
Home insurance premiums can vary depending on your coverage, location and credit history. The national average annual premium in 2021 was $1,398, according to the Insurance Information Institute.
2. Deductible
An insurance deductible is what you're responsible for paying before your policy kicks in. If you file a claim that gets approved, your deductible will be subtracted from the payout you receive. A home insurance deductible is often a fixed dollar amount that can range anywhere from $500 to $2,000. For claims related to hurricanes, wind or hail, the deductible might be expressed as a percentage of your property's insured value, often ranging from 1% to 10%.
3. Claim
You can file a homeowners insurance claim if you've experienced a covered event and would like your policy to help you pay for it. If the claim is approved, your insurer should issue you a payout up to your insured amount (minus your deductible). But filing a claim isn't always the best move—doing so could result in higher premiums. You could also lose any discount you get for having a clear claim history. However, filing a claim can make sense if you're up against a major loss or encounter repairs that far outweigh your deductible.
4. Exclusion
An exclusion is a specific situation that isn't covered by your home insurance policy. Damage or losses caused by a flood or earthquake, for example, are usually excluded. You'll likely need to purchase additional policies for these. Most home insurance policies also exclude regular wear and tear. When comparing home insurance policies, be sure to read the fine print to clarify what's covered.
5. Insurance Agent
Insurance agents work for insurers and can help you get enrolled in the right policy. They're generally free to use and can make it easier to compare home insurance policies from a single provider. Insurance brokers typically cast a wider net. They represent consumers and can help you shop for policies from several providers. Just keep in mind that a broker cannot enroll you in coverage.
6. Claims Adjuster
If you file a home insurance claim, your insurer will likely send an adjuster to your home to check out the damage and calculate a payout. That's assuming the claim gets approved—it could be denied if the adjuster suspects foul play or determines that the damage was caused by an uncovered event.
7. Liability Coverage
Standard home insurance policies include liability coverage. This protects you if a visitor gets hurt on your property—or if someone in your household accidentally hurts someone else or causes property damage while away from home. Liability coverage can help pay for legal fees if you're sued. It can also cover medical bills if someone is hurt on your property.
8. Dwelling Coverage
Most policies include dwelling coverage to repair or rebuild the physical structure of your home. Damage may be caused by smoke, fire, inclement weather, theft, vandalism or other covered events. One rule of thumb is to carry enough dwelling coverage to pay off your mortgage, but you might consider more if rebuilding costs are high in your area.
9. Insurance Rider
Adding a rider to your home insurance policy allows you to insure items that aren't normally covered. If you're an art collector, for example, you might add a rider to protect valuable artwork. Insurance riders typically increase the cost of coverage.
10. Alternative Living Expenses (ALE) Coverage
If your home is uninhabitable while it's being rebuilt or repaired, ALE coverage can help you pay for the extra costs of living somewhere else. It may be limited to a percentage of your dwelling coverage—or run out after so many months have passed.
11. Credit-Based Insurance Score
In some states, your credit-based insurance score may affect your home insurance premiums. This is different from your regular credit score and is designed to help insurers predict the likelihood of you filing a future insurance claim. Your credit-based insurance score is shaped by your payment history, debt load, the types of credit you use and more.
12. Replacement Cost Value
Your replacement cost value is the amount your insurance company will pay if your home is destroyed by an insured event. Getting a home appraisal can help you calculate your replacement cost value. Your home's age, square footage, location and fixtures will all play a role. Cost of labor is another important factor. Insurers use replacement cost value to help determine the cap on your dwelling coverage.
13. Recoverable Depreciation
Recoverable depreciation is the difference between an insured item's current value and how much it would cost to replace it. Let's say your lawnmower is stolen. It was worth $1,000, but you have to pay $1,500 to buy a new one. If recoverable depreciation is included in your insurance policy, your insurer might cut you a check for the $500 difference.
The Bottom Line
Homeowners insurance has a lot of moving parts, but understanding these key terms can help you navigate things with confidence. That can come in handy if you ever need to file a claim. Whenever in doubt, read through your policy to better understand your coverage. In some cases, shopping around for a new plan could help you save money.