More Indepth View of Home Insurance
A home insurance policy is effective for a fixed period of time, which is called the term of the policy. After the term expires, the provider maintains the right to cancel the policy. Many providers will choose to do so if the insured party makes too many costly claims against the policy (a claim is a report of loss and a request for reimbursement). The price of the policy is called the premium. Insurance providers base premium amounts on the risks they assume when underwriting (granting) a policy. For example, if a person buys a home in a location where natural disasters are rare, her premiums will be relatively low compared to the premiums for a policy on a house along a waterfront. A house with a burglar alarm and a smoke-activated sprinkler system lodged above the kitchen stove will cost less to insure than a home without these precautionary devices. If they choose not to cancel a policy at the end of term, most providers will at least raise the premiums of those who make numerous claims on the policy.
Homeowner’s insurance is not required by law in the United States. The overwhelming majority of Americans who buy homes, however, do so with a home loan (also called a mortgage), and mortgage lenders require borrowers to purchase homeowner’s insurance as a precondition of granting the loan. Lenders do this to protect their own interests, because until the loan is paid off, the lender owns part of the home, so if the house were to be destroyed, it would be a loss for the lender. With insurance, in the event that the home is destroyed, the insurance company would be required to pay off the rest of the loan, and the lender would recoup its loss. In most cases, the premium for the home insurance policy is included in the borrower’s monthly payments to the mortgage lender.
A mortgage lender may not require homeowner’s insurance if the value of the land on which the house is built is equal to or greater than the balance (the amount remaining) on the borrower’s loan. For example, if a borrower had only $40,000 left to pay on his mortgage, and the plot of land on which his house was constructed was appraised at $50,000, then the lender may not require him to continue maintaining a home insurance policy. In such a case, if the uninsured home were destroyed and the borrower could not pay the balance owed on the loan, the bank would foreclose the loan, or repossess the property, and thereby immediately recoup the value of the outstanding balance on the loan.
Although home insurance policies exclude some notable disasters, they do cover a wide range of costly damages. For example, most policies include protection against water damage (other than that caused by floods or homeowner negligence). For example, if an early frost hit, causing a homeowner’s water pipes to freeze and burst, the insurance company would pay for repairs. If a policyholder had tile damage resulting from a chronically leaking hot water heater, however, the insurance company likely would not pay for repairs. If there were ice damage from hail or from the weight of ice gathered atop the house, most policies would cover the necessary repairs. Policies also protect against violence and vandalism. This means that if a teenager threw a rock through an expensive picture window or drove across a homeowner’s lawn, expenses for repairs would be covered by the insurance policy. Most home insurance policies also include a provision called “loss of use,” according to which the owner of the policy is reimbursed for the expense of having to live in another residence while his home is being restored following a disaster.
Many homeowners seek additional coverage such as extended replacement cost coverage. Such coverage pays a certain amount above the policy limit, usually 120 to 125 percent, to repair or rebuild a home that has been destroyed by a peril covered in the policy. Most policies account for inflation (the overall rising of prices throughout the economy), which means that the company agrees to pay a higher amount for repairs later in the policy as such costs rise. Some events, however, cause repair prices to rise well beyond the rate of inflation, in which cases extended replacement cost coverage is a great benefit. For example, if a hailstorm caused significant damage to 1,000 roofs in a given neighborhood, roofers in the neighborhood might conspire to charge exorbitant rates for repairs because the demand was so high. While an insurance agency might properly assess damages at $5,000, a roofer may ask for $6,500. In such a case, extended replacement cost coverage would make up the difference.