The Basics of Home Insurance

In this blog, Campbell & Haliburton Insurance’s own, Daryl Arendt, explains the basics of home insurance, such as those complicated terms!

What Are The Basics of Home Insurance?

How do I determine how much to insure my home for?

Let’s face it, deciding what value to insure your home at can be a little daunting. For most of us our home is our most valuable asset. Further, we definitely don’t want anything bad to happen to it. However, we also want to know that, should the unexpected occur, we have enough insurance. So how much insurance do you need?

There are a number of ways that you and I can insure our homes:

Replacement Cost

Replacement cost means that, in the event of a claim, your home will be repaired or rebuilt brand new. If you have a partial loss, one that does not totally destroy the entire home, the insurance company will fix what was damaged area with new. If your entire home is destroyed, then the insurance company will rebuild it.

So how do we go about determining what it costs to rebuild your home?  As insurance advisors we have a number of different tools available to us. We ask a number of questions about your home to determine what the rebuild cost would be. This approach is considerably more accurate than simply taking a per square foot cost. For many of us, what becomes confusing is that the cost to replace our home often bears no resemblance to the amount we paid for it or what we would hope to sell it for. That is the difference between market value and replacement value.

Guaranteed Replacement Cost

Guaranteed replacement cost (GRC) adds one more layer of protection to replacement cost. With replacement cost, an insurance company will pay to rebuild your home up to the limit of insurance. However, with guaranteed replacement cost, they will pay to rebuild your home, even if the cost to do so exceeds the amount of insurance.

So how does that work?  Suppose that your home is insured for $350,000. In the event of a total loss fire, with replacement cost, the insurance company would pay up to $350,000 to rebuild your home. If it cost more than that you would be responsible for the difference. With guaranteed replacement cost, however, the insurance company would pay the additional costs to rebuild your home.  We should note, however, that there are typically some restrictions and limitations to this. This will also vary by insurance company. Don’t panic though, we will always discuss those with you before you sign on the dotted line!  Finally, our advisors will always recommend guaranteed replacement cost if it is available to you.

Actual Cash Value

Actual cash value accounts for the age, condition, life expectancy and resale value of your home.  An easy way to think about actual cash value is to keep in mind that depreciation will be applied to all claims, both partial losses and total losses.

While insuring to actual cash value may be cheaper than insuring to replacement cost, the amount that you will receive in the event of a claim will likely be significantly less as well.

So which is right for you?  In most situations homeowners will want their homes rebuilt should something happen. In those cases, replacement cost, or guaranteed replacement cost, if available is the best option. However, with whatever you choose, it is important to have the discussion about what kind of insurance and how much insurance before a claim, not after.