Basic Home Insurance: Is it Enough?

According to United Policyholders, a respected non-profit organization that provides consumer advice and information to homeowners nationwide, approximately two-thirds of homes in the US are under-insured. The main reason for this is that many homeowners only carry enough homeowners insurance to cover the payment of their outstanding mortgage in the event that their home is destroyed. This basic insurance is all that's required by their mortgage holder because it protects the lender's financial interests, but the fact is, the outstanding mortgage amount may be significantly lower than the actual value of your home or the amount that would be needed in order to rebuild should, for example, your home be burned to the ground in a house fire.

What is Basic Home Insurance?

There are several different protection levels of homeowners insurance available in North Carolina.  The most basic coverage is designed to protect you from losses from a specific list of named perils, usually about 16 in all, including:

• Fire, smoke and lightning
• Windstorms
• Hail
• Explosions
• Falling objects
• Riot or civil disturbance
• Damage from vehicles
• Theft or vandalism
• Volcanic eruption
• Freezing
• Sudden and accidental damage from artificially-generated electrical current
• Accidental discharge of water

Perils Not Covered

Since it's a “named perils” policy, this coverage offers no loss protection against any perils not listed. Take note that no ordinary homeowners insurance policy covers damage from flooding or earthquakes. To obtain protection from losses for these two perils, you must buy specialized coverage at an additional cost.

Replacement Cost vs Actual Cash Value

Though typically written as a replacement cost policy, basic coverage can be either replacement cost or actual cash value replacement. Replacement cost covers the price of repairing or rebuilding with materials of a similar kind and quality or replacing possessions with like or similar items. Actual cash value replacement coverage generally pays less in benefits. It's designed to repair, rebuild or replace according to current cash value, taking into consideration age, wear and tear (depreciation). This basic form of coverage will typically only pay a portion of your losses, requiring that you pay the difference out of pocket. Because of this difference, replacement cost is much preferred by most homeowners, as they're assured of getting full replacement of their property and personal belongings without depreciation. Make sure when buying an homeowners policy to know which you're getting.