Home Insurance

Quick Look

  • Homeowners always need home insurance
  • If you have a mortgage on your home, you probably pay your home insurance through your mortgage lender and your premiums are already included in your monthly payment
  • There are three main levels to home insurance coverage: Actual Cash Value, Replacement Cost, Guaranteed Replacement Cost

<< Understanding Basic Insurance Needs

Homeowners Always Need Home Insurance

If you don’t own a home, you don’t need home insurance (shocking!). If you do own a home, you definitely need it; in fact, you almost certainly already have it. If you have a mortgage there’s a good chance your policy premiums are part of your monthly payment and paid by your mortgage lender.

The Three Levels of Coverage for Home Insurance

When it comes to home insurance, the most important thing to know is what level of coverage your home policy provides. Then, you need to determine if that level is appropriate based on both your risk tolerance, and the location of your home. The three main levels of coverage are:

  • Actual Cash Value – this is the lowest level and essentially means the insurer will replace covered items (including the entire house) based on the cost to replace your property with new property of like kind and quality, less depreciation.
  • Replacement Cost – this covers the actual cash value of your property but does not take into account depreciation. So even though your physical property may have lost value due to a lot of use over the years (i.e. “depreciated”), you’re not penalized for that and in theory, could replace your property up to its original level of quality. The precise definition of this will be defined in your policy.

  • Guaranteed Replacement Cost – this covers the actual cash value but with a built in buffer for inflation, unexpectedly high construction costs, and more. If you want the ability to replace your property to a high standard, this is your best bet.

The level you select will largely depend on both your personal comfort level, and, how likely it is that your home may be completely wiped out. For example if you live in an area that is prone to wildfires, or tornadoes, you may want to opt for Guaranteed Replacement Cost. For a more comprehensive overview of home insurance we recommend this article from Investopedia.

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