Understanding Homeowners Insurance: Key Terms You Need to Know

At O1ne Mortgage, we understand that navigating the world of homeowners insurance can be daunting. Whether you’re a first-time homebuyer or looking to update your current policy, it’s crucial to familiarize yourself with some essential terms. This knowledge will empower you to make informed decisions and ensure you have the right coverage for your home. Here are 13 key home insurance terms you need to know.

1. Premium

Your home insurance premium is the amount you pay to keep your policy active, typically due monthly or annually. If you have an escrow account, your premium might be included in your monthly mortgage payment, with your mortgage lender paying the insurance premiums on your behalf. Premiums can vary based on your coverage, location, and credit history. According to the Insurance Information Institute, the national average annual premium in 2021 was $1,398.

2. Deductible

An insurance deductible is the amount you’re responsible for paying before your policy kicks in. If you file a claim and it gets approved, your deductible will be subtracted from the payout you receive. Home insurance deductibles often range from $500 to $2,000. For claims related to hurricanes, wind, or hail, the deductible might be a percentage of your property’s insured value, typically ranging from 1% to 10%.

3. Claim

You can file a homeowners insurance claim if you’ve experienced a covered event and need financial assistance from your policy. If the claim is approved, your insurer will issue a payout up to your insured amount, minus your deductible. However, filing a claim can sometimes result in higher premiums or the loss of any discount for having a clear claim history. It’s essential to weigh the pros and cons before filing a claim, especially for minor damages.

4. Exclusion

An exclusion is a specific situation not covered by your home insurance policy. For example, damage caused by floods or earthquakes is usually excluded, requiring additional policies. Most home insurance policies also exclude regular wear and tear. Always read the fine print to understand what’s covered and what’s not.

5. Insurance Agent

Insurance agents work for insurers and can help you enroll in the right policy. They are generally free to use and can simplify the process of comparing home insurance policies from a single provider. Insurance brokers, on the other hand, represent consumers and can help you shop for policies from several providers, although they cannot enroll you in coverage.

6. Claims Adjuster

If you file a home insurance claim, your insurer will likely send an adjuster to assess the damage and calculate a payout. The claim 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, which protects you if a visitor gets hurt on your property or if someone in your household accidentally causes injury or property damage elsewhere. Liability coverage can help pay for legal fees if you’re sued and 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. This coverage typically includes damage caused by smoke, fire, inclement weather, theft, vandalism, or other covered events. It’s advisable 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. For example, if you’re an art collector, 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. This coverage may be limited to a percentage of your dwelling coverage or run out after a certain period.

11. Credit-Based Insurance Score

In some states, your credit-based insurance score may affect your home insurance premiums. This score is different from your regular credit score and helps insurers predict the likelihood of you filing a future insurance claim. Factors influencing your credit-based insurance score include your payment history, debt load, and types of credit used.

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. A home appraisal can help you calculate this value, considering factors like your home’s age, square footage, location, and fixtures. Insurers use replacement cost value to determine the cap on your dwelling coverage.

13. Recoverable Depreciation

Recoverable depreciation is the difference between an insured item’s current value and the cost to replace it. For example, if your lawnmower is stolen and it was worth $1,000 but costs $1,500 to replace, recoverable depreciation in your policy might cover the $500 difference.

The Bottom Line

Homeowners insurance has many moving parts, but understanding these key terms can help you navigate your policy with confidence. This knowledge is invaluable if you ever need to file a claim. Always read through your policy to understand your coverage fully. In some cases, shopping around for a new plan could help you save money.

At O1ne Mortgage, we’re here to help you with all your mortgage and insurance needs. Call us at 213-732-3074 to speak with one of our experts and find the best coverage for your home. We pride ourselves on providing top-notch service and ensuring our clients have the peace of mind they deserve.