The Basics of Homeowner's Insurance

The key to understanding homeowner's insurance is to cut through the jargon and answer the questions: "Just what am I insured for and for how much?" But first, let's look at some of the terms you need to learn.

· Replacement value refers to the amount it would cost to replace an insured item today. For example, if you insure your home for the full replacement value and it burns down, the insurance company needs to replace it. Period. So even if you've insured your house for $100,000 but construction costs have risen 25 percent since you purchased your policy, the insurance company will need to cough up $125,000 to rebuild your house.

· Market or cash value means the amount an insured item is worth on the market today. If you insure your house for market value, you need to periodically reassess this amount and adjust your insurance policy accordingly. The reason is that if your house burns down, the insurance company will give you the amount of cash specified in the policy. Take the house in the previous example. If the $100,000 insurance policy had been a cash value policy instead of a full replacement policy, the owner would only have received a check for $100,000 even though it would cost $125,000 to rebuild.

· Liability is the last concept you need to understand before building the residential portion of your insurance structure. Residential insurance covers your legal liability if someone is injured either on or off your property or in your residence. Liability is one of the most important protections you get with residential insurance. If your neighbor slips on your wet kitchen floor and sues you for negligence, or if you accidentally hit someone with a golf ball after a great tee-off, the liability portion of your residential insurance will cover your legal fees and any damages you must pay up to the amount specified in your policy. More on that later.