There are many variables involved in the purchase of a new home. Negotiating the price, qualifying for a loan, figuring out much money you have to bring to the closing, what the closing costs include and purchasing the home insurance policy. Many people share the perception that home insurance is only necessary for meeting the lenders terms as a requirement to close. Typically people look for home insurance at the last minute, seeking the lowest price.

What makes a house a home? The answer is the things in the house and the people who live there. Your family and possessions are the most valuable things in your life. How are these protected? Home Insurance! Whether you are purchasing a home or currently own one, the truth is, home insurance may be the most important aspect of home ownership. Your home insurance policy is designed to protect the things that you value the most by providing financial protection for the unthinkable.

Let’s take a look at the general coverage provided in a home insurance policy. When speaking to my clients, I like to use a metaphor to help them understand how the policy works. I tell people to think of each coverage as an individual “bucket of money”. Depending on what happens will determine which “bucket” will be used. Sometimes only one “bucket” of money will be needed for a claim. Other times, several “buckets” will be needed.

The home insurance policy is divided into two sections. Section One addresses the tangible property; the home (dwelling) and the “stuff” inside the home. Section Two focuses on liability (in case someone sues you). Your home insurance policy will include a declarations page which is a summary of the coverage limits available within your specific policy.

Section One

Coverage A– Dwelling coverage: The home insurance policy refers to the house as the dwelling. The dwelling is the main structure on the property and the structures attached to it such as porches and garages. The value for the dwelling is the cost to rebuild the dwelling should there be a catastrophic loss. The dwelling is insured at 100% of its reconstruction value.

Coverage B- Other structures: These are structures on the residence premises (property) that are not attached to the dwelling such as a detached garage, guest house or a fence. The amount of coverage is usually an automatic percentage of the dwelling value (coverage A). Typical percentage values include 2%, 5% or 10%. If more coverage is needed it can be added to the policy as a declared value for a specific structure.

Coverage C- Personal property or contents: Contents coverage provides protection for the things in the home. For example; your furniture, electronics, clothes, dishes, etc. This coverage amount is usually an automatic 50% of the dwelling value.

Coverage D- Loss of use: This reimburses you for the extra ordinary living costs as a result of the damage to your home. For example, you have to stay in a hotel while the home is being repaired. The amount of coverage available is usually an automatic 20% of the dwelling value.

There are deductibles which apply under Section One. A deductible is the amount of money you are required to pay before the insurance company pays. Home insurance companies now have specified deductibles depending on what caused the damage.

There is an all other perils (AOP) deductible. A peril is basically the event that occurs to trigger the policy. Examples of perils are wind, fire, lightning, etc. These perils are specifically noted in your policy. The AOP deductible applies to any covered claim under Section One unless otherwise specified. The amount of this deductible is your choice. Not all companies offer the same deductible possibilities but common deductible options are $500, $1,000 and $2,500.

There may also be a separate hurricane deductible or sinkhole deductible. These deductibles only apply when the home is damaged by a hurricane or a sinkhole. The deductibles are not necessarily equal to each other or your AOP deductible. The amount of the deductible will apply based on how your policy is designed. These deductibles are usually a percentage of the dwelling amount. These deductibles can be large depending on the amount of coverage shown for Coverage A.

Section Two

Coverage E- Liability: Protects the insured from legal liability for bodily injury or property damage to others. The basic limits of liability are $100,000 but higher limits are usually available.

Coverage F- Medical payments: Pays for medical bills to other parties who have become injured without regards to the insured’s legal liability. The basic limits for medical payments are $1,000 and like liability, higher limits are usually available.

There are other coverage types, exclusions and limitations within the home insurance policy other than what I have mentioned. Read your policy carefully and understand what perils are covered and what the exclusions are. Not all policies are the same. Depending on the company you choose, the coverage limits within your policy may be modified to fit your specific needs. Shopping for insurance should be an informative process. Make sure to find an insurance agent who is willing to take the time to explain your coverage and what it means to you. The insurance agent who offers you the best premium may not be offering you the best policy.