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The best time to assess how well your homeowner’s insurance will protect you from damage caused by, for example, a fire, is before one actually occurs. Many standard policies provide protection against damage from weather events like lightning and hail, as well as fire and theft. Many also offer some coverage for the costs you’ll incur if you need to live somewhere else while your home is being repaired after being damaged. But the specific coverage of each policy can vary greatly.
What types are there?
Homeowner’s insurance policies differ according to the coverage they provide. For instance, an actual cash value (ACV) policy covers the cash value of your home, which generally is calculated as its replacement cost, less depreciation. This may fall far short of the cost to actually rebuild your home.
A replacement cost value (RCV) policy typically covers the cost to rebuild your home, using comparable materials and returning it to the way it was before it was damaged. An extended replacement cost policy can offer additional coverage for construction costs rising in the aftermath of a natural disaster. Of course, the greater protection these types of policies provide usually also means higher premiums.
What other risks can your policy cover?
You may want to consider separate protection for risks that aren’t covered by many standard homeowner’s policies. These include:
Flood insurance. If your home lies within a federal flood zone, you probably purchased flood insurance when you bought it. Even if you live outside a federal flood zone, you may want to consider flood protection. Many standard homeowner’s policies exclude flood coverage, yet floods are the most common and costly natural disaster in the United States, according to FEMA.
Earthquake protection. Do you live in an area at risk of strong earthquakes? You’ll probably need separate coverage to protect against potential damage.
Liability insurance. If someone who doesn’t live with you is injured while on your property, your homeowner’s policy might not cover all the medical and legal costs that could result. An umbrella or excess liability policy provides additional coverage.
Personal property endorsement. Many homeowner’s policies cover possessions — often as a percentage of the insured value of your home itself. But if you own expensive jewelry, artwork or other items, it may make sense to boost your coverage through a personal property endorsement.
Time for a review?
Because every policy is different, you’ll want to regularly review your coverage to determine if you need to adjust it. Your accounting professional can provide guidance.