Home Purchase Insurance Basics

Home purchase insurance is a type of property insurance that covers the cost of buying your home. It can be purchased as part of an existing homeowners policy, or it may be sold separately from other types of coverage, such as renters’ and flood policies. Homeowners who purchase their first homes often choose to buy this additional protection because they don’t know what kind of problems might arise in the future. The following are home purchase insurance basics:

Coverage limits:

This refers to how much money you’re covered for if something happens during the policy term. You’ll pay more for higher limits; however, there’s no point in having high limits unless you need them. If you have $100,000 worth of damage but only spend $50 on repairs, then you’ve wasted half your limit.

Deductibles:

These refer to the amount of loss before the insurer makes any payment. For example, let’s say you have a deductible of $1,500. That means you’d have to cover at least $1,500 out-of-pocket before the insurer would start paying anything toward repair costs. A lower deductible usually results in less expensive premiums. However, deductibles aren’t always negotiable. Some insurers require them, while others allow you to negotiate with them. In general, though, the larger the deductible, the cheaper the premium.

Replacement value:

The replacement value of your house is the price you could get for it today if someone were willing to sell it immediately after its destruction. This number isn’t necessarily accurate since many people won’t want to sell right away. Replacement values vary widely depending upon location, age, condition, and even neighborhood. They also change over time due to inflation.

Loss adjustment factor :

The LA is used to determine whether your claim was caused by a peril insured against. An LA of 1 indicates that all claims should be paid based solely on actual cash losses incurred. An LA greater than one suggests that the insurer has already been compensated for certain expenses so that the remaining balance represents actual damages.

Bottom line

If you decide to go ahead with a home purchase, make sure you understand the terms and conditions of your homeowner’s policy. Ask questions about everything from deductibles to exclusions. And remember that not every company offers home purchase insurance. So shop around until you find one that fits your needs.