Insurance Rate Methods
Insurance rate methods can be grouped into two categories: actual value and period rates.
Actual value rates are calculated using a procedure that evaluates the physical condition of the property being insured. Period rates are prices based on an insurance company’s estimates of current replacement costs for specific types of property, such as wooden frame dwellings.
Insurance companies calculate home insurance premiums using mathematical formulas that include factors such as location, house age and size, roof coverings, etc. Premiums also depend in part on the type and amount of coverage selected by the homeowner. For example, if you want to be covered for damage from fire or theft you will need to pay more than if your only concern is hurricane damage.
Actual Value Methods
Actual value methods fall into two categories: Replacement cost methods and Cash value methods. The key difference between the two lies in how they assess the economic cost of replacing damaged property or repairing it to a satisfactory standard.
Replacement Cost Methods - An exact replacement cost method bases price on what it would actually cost to replace the damaged property with comparable property at today’s prices for materials and labor in the same location. The insured must show receipts, canceled checks or other proof that the money was actually spent for repairs. If not, they may have to use a cash value method to determine their insurance settlement.
An actual value method may produce a more accurate estimated repair cost than a cash value method. However, in an actual value method, there is no check on whether the insured actually spent the money; if not, he or she will have to pay the higher premium. In contrast, in a cash value method an independent appraiser must confirm whether or not you actually spent the money; if so, your insurer will pay a settlement based on that figure.
Cash Value Methods – A cash value method bases price on the market price of replacement property. The market price is usually highest for large residential properties or those located in high-priced areas. This method tends to produce a lower estimated repair cost than an actual value method. However, it also results in the lowest premiums because the insurer is less concerned about what you actually spent. Therefore, while the cash value method may produce a more accurate estimate of annual maintenance costs, the actual value method might produce a lower premium for some homeowners.
The amount of coverage you need depends on where you live and whether or not you have insurance through your landlord. Many people know that their homeowners insurance policy covers damage resulting from hurricanes, but they do not realize that other factors can affect their rates, like fire and theft.
Some states mandate minimum coverage limits for home insurance policies depending on location (e.g. Florida is $5000 for a two-family residence). If your state has no minimum requirement, check with your insurer to find out what is required by law in terms of coverage limits. If you are not insured through your landlord and the amount of coverage you have on any other insurance policies do not meet the legal requirements, then you may need to adjust your coverage limits.
For example, if you live in an area that has no law requiring certain types of insurance (e.g. liability, medical payments) or a certain amount of liability coverage, then it would be good to review with your agent how much protection these coverages afford you in case of an accident or medical emergency as well as potential risks when traveling.
Many people know that their homeowners insurance policy is only required to cover damage resulting from a hurricane, but they do not realize that other factors can affect their rates. For example, they might believe that fire loss is covered by their plan but, in fact, it is usually not included unless a family member has a separate policy specifically for fire loss.
In many states the minimum legal requirements for residential property insurance are determined by state law and vary from state to state, so it is important to check with your insurance company about what coverage is required for your area.
"Prudent Purchasers" are the people who know that their homeowners insurance policy covers damage resulting from hurricanes, but they do not realize that other factors can affect their rates. For example, they might believe that fire loss is covered by their plan but, in fact, it is usually not included unless a family member has a separate policy specifically for fire loss. In many states the minimum legal requirements for residential property insurance are determined by state law and vary from state to state, so it is important to check with your insurance company about what coverage is required for your area.
Many people know that their homeowners insurance policy only covers damage resulting from a hurricane, but they do not realize that other factors can affect their rates. For example, they might believe that fire loss is covered by their plan but, in fact, it is usually not included unless a family member has a separate policy specifically for fire loss. In many states the minimum legal requirements for residential property insurance are determined by state law and vary from state to state, so it is important to check with your insurance company about what coverage is required for your area.
If you own a business that occupies real property which includes a personal residence then you have an additional level of liability protection on top of your standard home insurance.
This level of liability insurance may be required by the landlord and/or your state of residence.
Be prepared for a number of variables when choosing home insurance. The peace of mind that comes with having insurance only lasts as long as your policy covers damage to property outside the house. A standard fire damage clause in most policies would only pay for structural damage to the house itself if it is caused by a fire, however many homeowners are not aware that this clause can also protect them from other types of disasters, such as theft, vandalism or earthquakes. "If you have valuable artwork, antiques, or collectibles stored in your home it’s extremely important to get coverage that protects you from fire and water damage. For items over $1,000, you should consider getting an endorsement on your policy."
Home insurance policies can be cancelled for a variety of reasons which include: nonpayment of premium, non-disclosure of material facts, failure to pay claims when due, undisclosed additions or alterations to the property and if the home is not used as a residence. A review of the cancellation clauses in your policy is advisable. For example: if your homeowner’s insurance policy has been in force for three years and you move from California to New York and don’t purchase homeowners insurance again within a specified time frame after moving, you may find yourself uninsurable if an accident occurs during that time-frame.
Conclusion
The information contained above is only a quick summary of the basic insurance coverage offered under the homeowners policy. The nuances of your policy may be different and you should consult your policy or speak to your agent for additional details.
Homeowners Insurance is one of two required coverages in most states (the other coverage being auto insurance). However, there are some states where renters are required to buy renters insurance instead or in addition to buy homeowners insurance. Typically a renters policy will have less coverage than a standard homeowners policy.
The content of this article is provided for informational purposes only and does not constitute legal or professional advice on any subject matter.
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Insurance Rate Methods