Home insurance is the kind of property insurance that covers the damages and losses of someone’s residence. The insurance policy also covers personal property such as furniture and other assets you have in your home.
Additionally, home insurance can provide liability coverage, which means you’ll be covered against accidents that take place on your property. Therefore, if someone gets hurt on the property, liability coverage will take care of any medical or legal expenses.
If you are a tenant, you may want to consider renters insurance instead.
What Does Home Insurance Cover?
Your policy can be customized in many ways, but the standard coverage typically includes the below.
Damage To The Property
If your property’s exterior is damaged by an insured event, such as a natural disaster, your insurance will compensate you. The amount paid out will typically only cover the cost to rebuild the property. You can add further coverage to your policy to insure your personal property, but this will increase your premiums.
Note, if you live in an area that’s prone to natural disasters, near a large body of water, by a cliff, etc, you may also need to pay an additional premium. If you don’t disclose this information and need to make a claim, you run the risk of the insurer not paying out.
Your home insurance may also provide personal liability coverage. This means you will be covered if someone gets injured or dies on your property and you’re considered liable for it. If you have a pet and it attacks someone on your property, personal liability will cover their medical expenses. It can also protect you if they decide to sue.
On average, personal liability is £100,000, but you can extend your coverage by paying a bit more. If you go for an umbrella policy of the home insurance, you will get a premium of £1 million.
Additional Living Expenses
Additional living expenses will cover the costs of having to live elsewhere in case your property becomes inhabitable. This coverage will pay for living expenses while your property is being repaired. This includes hotel bills, meals, and other living expenses.
This allows you to maintain your standard of living while your property without causing financial distress.
What Are The Different Kinds of Home Insurance Coverage?
There are several types of home coverage, however, the most common are actual cash value, replacement cost, and guaranteed replacement cost.
Actual Cash Value
Actual cash value will cover the value of your belongings and your property after deducting depreciation.
Replacement cost will cover the actual value of your belongings and your property without deducting depreciation. This allows you to repair or rebuild your property to its original value.
We explain which is better between replacement cost and actual value here.
Guaranteed Or Extended Replacement Cost
Guaranteed or extended replacement cost means you will receive more coverage than what your policy limit states, usually by 20 to 25%. This allows people to rebuild their property without covering their value.
How Much Does Home Insurance Cost?
When you are calculating your policy coverage, it is essential that it’s enough to rebuild your property from the ground up. Now, this does not mean the price will match the price you paid when you originally property as that price includes the price of the land, too. The price should equal the cost of materials, labour, etc. only.
Upgrades and features of the property will also be taken into consideration when calculating the cost of home insurance.
To paint a clearer picture, these are the factors that are considered:
Type Of Plan
The type of plan you choose will determine the coverage of your home insurance. For example, if you cover only the building, they will consider the value of the home structure to provide the necessary coverage. This is known as buildings insurance.
If you cover the contents of the home, they will consider the value of all your personal belongings and your jewellery as well. This is known as contents insurance.
You can also choose both above and go for a combined buildings and contents insurance policy.
Value Of The Building
The cost of reconstruction will be added to the value of the building and not to the property’s market value. Home insurance provides optimum coverage when it covers the rebuilding cost adequately.
To calculate the value of the building, they will multiply the built-up area of the property by the cost per square foot. For example, if a built-up area is 600 square feet and the construction cost is £20 per square foot, the insurance will be worth £12,000.
Value Of Personal Belongings And Jewellery
The value of personal belongings and jewellery needs to be specified when the cost of home insurance is being calculated. You should ensure you accurately price your belongings as the insurer will use this when calculating replacement costs.
How To Make A Claim
Similar to making a mobile phone insurance claim, if something happens, you’ll need to make the claim as soon as possible. You should have to hand your full policy documentation to ensure you are covered for the event that has happened. Lastly, be sure to document everything that happened (be honest – they will find out…) and record every and all conversations with the insurer.
What Is A Deductible?
If the claim is accepted, you, the homeowner, will then have to pay an excess/ deductible, which is a percentage you pay out-of-pocket. An insurance deductible is an amount you pay when you make a claim against your policy.
For example, let’s say you make a claim for interior water damage in your home and you have an excess of £500. A claim adjuster comes in and calculate the estimated cost to repair your property – which is £5,000 in this scenario. The insurance company will give you £4,500 and you will pay the excess difference of £500.
If the excess amount on your home insurance policy is high, your monthly or annual premium will be low. If the excess amount is low, the premiums will be higher. This is important to keep in mind when you are purchasing your insurance.
James Banerjee is an Account Director who graduated from the University of Kent in 2014. He works in SEO on clients such as HSBC UK and Nestle and he has a keen interest in personal finances and money-saving advice.