Insurance Archives - Credit Sesame https://www.creditsesame.com/learn/insurance/ Credit Sesame helps you access, understand, leverage, and protect your credit all under one platform - free of charge. Thu, 14 Nov 2024 05:50:37 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 https://www.creditsesame.com/wp-content/uploads/2022/03/favicon.svg Insurance Archives - Credit Sesame https://www.creditsesame.com/learn/insurance/ 32 32 What are the different kinds of home insurance? https://www.creditsesame.com/learn/insurance/what-are-the-different-kinds-of-home-insurance/ Wed, 14 Aug 2024 13:16:51 +0000 https://www.creditsesame.com/?post_type=learn-knowledge-hub&p=206480 What are the different kinds of home insurance Home insurance is a way of making sure you have funds available to cover losses and damages to your residence or the assets within it. Home insurance involves paying a relatively small amount of money regularly with the insurance provider promising to pay if you make a […]

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What are the different kinds of home insurance

Home insurance is a way of making sure you have funds available to cover losses and damages to your residence or the assets within it. Home insurance involves paying a relatively small amount of money regularly with the insurance provider promising to pay if you make a valid claim. 

Your home is probably the biggest purchase of your life. The median sales price of a house in the United States was $454,900 in the third quarter of 2022, giving homeowners plenty of reasons to protect what may be their largest investment outside of a retirement fund.

Home insurance is meant to provide financial security resulting from problems big and small at home. It is especially useful if a disaster happens against since you’re unlikely to have enough cash on hand to rebuild your home.

Understanding how home insurance works can make it easier to decide what type of insurance is right for you.

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The fundamentals of home insurance

Homeowners insurance pays out if your home is damaged or destroyed in an event covered by the insurance policy. It also typically covers injuries to someone on your property or if you’ve caused property damage elsewhere.  

What is home insurance?

Home insurance is a contract between you and an insurance company. You pay an annual premium in exchange for the insurer paying to repair or replace your home if it is damaged or destroyed by a covered peril. 

After making a claim, you usually pay a deductible to cover your share of repairs. The insurer pays the rest, up to your coverage limits.

Why should you have home insurance?

Insurance is meant to cover loss or disaster, and losing your home to a fire or some other catastrophe is practically the definition of disaster. Without homeowners insurance, you would have to pay for repairs yourself. Your mortgage provider and property tax assessor still expect their payments, whether you are insured or not. 

Homeowners insurance is not legally required. But if you have a mortgage, then your lender likely requires you to buy insurance to protect its investment. Even without a mortgage, home insurance is a good idea to protect you from liability and other problems.

Home insurance must not be confused with mortgage insurance, which reimburses your lender if you fail to make loan payments or default on the loan. Mortgage insurance is often required when buying a home if your down payment is less than 20% of the home loan.

The different types of home insurance

There are six categories of home insurance coverage those that offer different types of protection. Understanding the differences can help you decide what you need.

The type of home insurance you should buy is largely dependent on the type of home you live in and your preferences for coverage. You may want everything covered, or just the basics. Renters, homeowners with a lot of valuable possessions, and condo and trailer owners may each need and want different kinds of insurance.

  1. Dwelling coverage. Dwelling coverage is typically for an amount of money to rebuild your home. It covers the structure of your home, along with the walls, floors, windows and roof. Built-in appliances such as furnaces are covered, as are attached property to your home like a porch, garage or deck.
    Covered claims include for damage caused by fire, lightning, wind, freezing, and hail. A flood, earthquake and routine wear and tear are not typically covered.
  2. Other structures coverage. Some standard policies include other structures in their dwelling coverage. If not, then you may want to buy coverage for other structures such as a shed, fence, gazebo or garage that are not attached to the house.
    Most policies cover events that are not specifically excluded. Like dwelling coverage, you are likely to be covered in case of a fire or snow damage. The amount most people need is typically 10% of dwelling coverage.
  3. Personal belongings coverage.Also called personal property coverage, this coverage is for furniture, clothes, electronic devices, sports equipment and other personal items that are stolen or destroyed by fire, hurricane or other insured event. Most policies insure the items wherever they are, such as if your laptop computer is stolen overseas. Coverage is typically for 50% to 70% of the amount of dwelling insurance. Expensive items like jewelry and furs are covered, but usually up to a set dollar amount.
  4. Liability protection coverage.Liability covers against lawsuits for bodily injury or property damage that policyholders, family members or pets cause to other people either unintentionally or through neglect. The cost of defending the policy holder in court and any court awards are covered by the liability portion of a policy, up to the policy limits. A typical amount of coverage is $100,000 to $500,000.
  5. Additional living expenses coverage.Also called loss of use, this part of a homeowners policy helps if your home is uninhabitable after a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses while your home is being rebuilt.
    The coverage amount for additional living expenses is usually 20% of dwelling coverage.
  6. Medical payments coverage.Typically, medical payments coverage pays if you cause physical injury to someone outside your home. Unlike liability coverage, no lawsuit is involved and you do not have to be at fault for medical coverage to pay out.

Overall, the details of coverage may vary so it is important to read the terms of each policy, which may be unique to you.

Matching policies to your needs

HO-1 typically covers 10 perils, as opposed to 16 in an HO-3. Coverage is limited and many insurers no longer offer this type of policy form. 

HO-2 also provides limited coverage, but it may cover a broader range than HO-1. 

Most common: HO-3

An HO-3 is the most common policy offered. It is “open peril” for the structure of your home that will pay for repairs caused by any peril that is not specifically excluded. Earthquakes and floods are often excluded. 

Personal property, however, is a “named peril.” This means that belongings are only covered if they’re damaged by perils specifically listed in the policy. If the peril is not listed then your belongings are not covered.

HO-3 policies are often required by lenders. Owners of multifamily homes may want this coverage to cover risks of having renters live in their houses.

Limited coverage: HO-1 and HO-2

The coverage types listed above are offered in several types of insurance policies called “policy forms.” Some policies offer more coverage than others. They may have different names at different insurance companies, but typically the policy forms are known as HO-1 to HO-8. 

Renters: H0-4

This policy is specifically for renters and covers 16 perils and personal liability coverage. Personal belongings are insured, but the building’s structure is not.

Extensive coverage: HO-5

An HO-5 policy offers the broadest coverage. Your home and belongings are covered for all causes except those excluded in the policy. Homes must typically be well maintained and in low-risk areas. These policies are sometimes called “comprehensive form” or “premier” coverage.  

Condo and co-op owners: HO-6

An HO-6 policy is designed for owners of condominium and cooperative units. Personal belongings and structural parts of the building that the policyholder owns are covered, such as the interior walls of an owner’s unit. It protects against 16 perils, and provides personal liability coverage and covers additional living expenses.

Mobile homes: HO-7

Owners of mobile or manufactured homes, trailers, sectional homes, RVs and modular homes may want an HO-7 policy. It covers the home’s structure, personal belongings, liability, additional living expenses and medical payments.

Personal belongings are covered under a named perils policy. The specific circumstance causing the damage must be named in the policy, such as fires, theft, smoke and vandalism.

Older homes: HO-8

Older homes under an HO-8 policy are covered for up to 10 perils. Reimbursement for any covered damage is paid on an actual cash value basis instead of the replacement cost. Depreciation costs are usually subtracted. Historic homes and registered landmarks usually have this type of policy. 

What is not covered by home insurance?

Damages from flooding and earthquakes typically are not covered by home insurance. You can buy add-ons for such coverage. 

Here are some other incidents that are usually excluded from coverage: 

  • Intentional damage
  • Water damage from drain and sewer backups
  • Landslides and sinkholes
  • Mold, fungus and infestations by birds and vermin
  • Wear and tear or neglect
  • Nuclear hazard
  • War or other government action
  • Power failure 

Can I withdraw money from my life insurance policy?

Insurance is meant to cover loss or disaster, and losing your home to a fire or some other catastrophe is practically the definition of disaster. Without homeowners insurance, you would have to pay for repairs yourself. Your mortgage provider and property tax assessor still expect their payments, whether you are insured or not. 

Homeowners insurance is not legally required. But if you have a mortgage, then your lender likely requires you to buy insurance to protect its investment. Even without a mortgage, home insurance is a good idea to protect you from liability and other problems.

Home insurance must not be confused with mortgage insurance, which reimburses your lender if you fail to make loan payments or default on the loan. Mortgage insurance is often required when buying a home if your down payment is less than 20% of the home loan.

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What are the 16 perils?

Policies such as the popular HO-3 policy offers the broadest coverage against 16 disasters or perils. They are:

  1. Fire or lightning
  2. Windstorm or hail
  3. Explosion
  4. Riot or civil commotion
  5. Damage caused by aircraft
  6. Damage caused by vehicles
  7. Smoke
  8. Vandalism or malicious mischief
  9. Theft
  10. Volcanic eruption
  11. Falling object
  12. Weight of ice, snow or sleet
  13. Overflow of water from plumbing, heating, air conditioning, automatic fire sprinkler system, or household appliance.
  14. Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water system, or air conditioning or auto fire-protective system.
  15. Freezing of plumbing, heating, air conditioning, fire-protective system, or household appliance.
  16. Artificially generated electrical current
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In a nutshell

Home insurance can sound complicated, but it does not have to be. Most homeowners want to cover the full cost of replacing their home if it’s totally destroyed by a disaster such as a fire.

After that you may also want to insure your belongings so they can be replaced, and have liability insurance in case someone is hurt on your property. Coverage for additional living expenses can be handy if you have to live at a hotel while your home is being repaired.

While home insurance is not required by law, your lender (if applicable) will probably require it. Insurance can make it easier to sleep at night knowing you do not have to pay out of your pocket to replace your home if something major happens to it.

If you’re thinking of buying a home, be sure to shop around for home insurance policies that fit your needs. Your auto insurance company may be able to a discount for having multiple policies, and you may qualify for discounts if your home has storm windows, fire sprinklers and other safety features.

Home insurance can give you peace of mind and help protect your financial future by protecting what’s likely to be one of the biggest purchases of your life — your home.

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]]> What are the different types of life insurance? https://www.creditsesame.com/learn/insurance/what-are-the-different-types-of-life-insurance/ Wed, 14 Aug 2024 12:54:42 +0000 https://www.creditsesame.com/?post_type=learn-knowledge-hub&p=206474 What are the different types of life insurance According to LIMRA, one of the largest trade associations in the U.S. insurance industry, the most common reasons for buying life insurance are to pay for burial and other end-of-life expenses, supplementing lost income if the primary wage earner dies, and transferring wealth from one generation to […]

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What are the different types of life insurance

According to LIMRA, one of the largest trade associations in the U.S. insurance industry, the most common reasons for buying life insurance are to pay for burial and other end-of-life expenses, supplementing lost income if the primary wage earner dies, and transferring wealth from one generation to the next. Around 52% of Americans buy it themselves or through an employer. Understanding the different types of life insurance can make it easier to decide if you want to buy a policy.

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The fundamentals of life insurance

Life insurance is a contract between a policyholder and an insurer. The policyholder pays premiums during their lifetime in exchange for the insurer promising to pay a designated beneficiary a sum of money when the insured person dies.

The first American life insurance companies started during the colonial period. In 1759, the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers was set up. Episcopalian ministers started a similar fund in 1769.

Life insurance sales began to increase by the end of the 1850s, just before the Civil War started. Sales climbed to $200 million by 1862 and tripled to just under $600 million by the end of the Civil War. In 2021, life insurance premiums surpassed $159 billion, according to the National Association of Insurance Commissioners.

The different types of life insurance

Life insurance is offered in different forms to meet different needs and wants. The most popular and cheapest type — term life insurance — is temporary and a set length of time. You could outlive a term life policy.

The other kinds we’ll cover are permanent life insurance policies. They cover the insured person’s entire life unless the insured stops paying the premiums. Permanent policies are usually more expensive than term.

Term life insurance

Term life insurance is a policy bought to last a specified period of time, such as 1, 5, 10, 20, or 30 years. Coverage expires when that term ends, and payout only happens if the insured person dies during the specified period. If the insured outlives the original policy period, the policy may be able to be renewed, though premiums may be higher.

The death benefit is to replace income that may have been earned during the set period and is needed to cover expenses. These can be everything from daily living expenses for a surviving spouse, making sure a child is taken care of, or paying off a large debt such as a mortgage.

The different types of term life are:

  • Level term: Death benefit stays the same throughout the policy.
  • Decreasing term: Potential death benefits reduced over life of policy, usually in one-year increments. The policy is renewable.
  • Renewable term: Price quote is for the year policy is purchased. Premiums increase annually.
  • Convertible term: Term policy can be converted to permanent insurance.
Whole life insurance

Whole life insurance is a type of permanent life that accumulates cash value. It covers the insured’s entire life, provided they keep up with premium payments.

Cash value is money that the insurance company has collected in premiums that exceed what it needs to pay out claims. Policyholders can withdraw or take out a loan against the accumulated cash value.

Cash value is a living benefit; the insurance company keeps these funds when the insured dies. Loans against the cash value may reduce the death benefit.

Universal life insurance

Universal Life (UL) is another type of permanent life insurance. It has cash value that earns interest.

Premiums are flexible and can be adjusted over time. They can be set with a level death benefit or an increasing one.

Variable universal life insurance

Variable universal is a type of permanent life insurance that lets you invest the cash value in a separate account or accounts, similar to mutual funds. Like universal life, it has flexible premiums that can be set with a level death benefit or an increasing one.

Final expense life insurance

Final expense is a type of whole life insurance that is permanent. It usually has a lower payout amount than other types of life insurance. Most life insurance policies focus on income replacement, while final expense insurance covers end-of-life expenses. These can include:

  • Funeral arrangements
  • Burial costs
  • Remaining medical expenses
  • Remaining legal expenses that your beneficiary must settle

What are the benefits of life insurance?

Life insurance replaces your income if you die. Your spouse and children can have enough money to pay off a mortgage, attend college, pay off loans, and have enough income during what would have been your working years. Term life insurance can be set until you reach retirement age to help your beneficiaries avoid financial hardship.

Life insurance also offers tax advantages, among them:

  • Tax-deferred growth of cash value
  • Tax-free dividends
  • Tax-free death benefits

Can I withdraw money from my life insurance policy?

Yes, if you have a permanent life insurance policy. You can take out cash before you die through four main methods:

  1. Surrender: Cancel the policy and take the surrender value cash payment minus fees.
  2. Withdrawal: The money you take out as a lump sum or in payments usually isn’t subject to income taxes if it isn’t more than what you’ve paid into the policy. A withdrawal will likely reduce your death benefit.
  3. Loans: The money borrowed against a policy doesn’t come from the policy. The policy is used as collateral. These loans require paying interest, but it’s usually a lower rate than other types. The outstanding balance will typically be deducted from your death benefit if you don’t repay the loan.
  4. Pay life insurance premium: Cash value can be used to pay part or all of your policy premiums. Older policyholders may like this option because it leaves their retirement income for living expenses while keeping a life insurance policy.

If the cash value of a policy grows larger than the death benefit and you don’t use it while alive, then the higher cash value can increase the death benefit amount for your beneficiaries.

What happens if I stop paying my life insurance bill?

Your insurance company will cancel your policy, especially if it’s a term policy. You may get a 30-day grace period before your policy is canceled.

Permanent life insurance policies, however, may not automatically lapse from a missed payment. You may have three options:

  • Cash out the policy, though you’d no longer have life insurance coverage.
  • Agree to a reduced death benefit that no longer accumulates cash value.
  • Convert to term coverage.

If you’re having financial problems and missed several payments on your insurance policy, ask your insurance provider what you can do to have it reinstated. You may be given up to five years to get current on premiums, plus paying interest.

What isn’t covered by life insurance?

Life insurance doesn’t cover everything that can kill you. Common things not covered in a policy include:

  • Preexisting conditions
  • Accidents while under the influence of drugs or alcohol
  • Suicide
  • Criminal activity
  • High-risk activities leading to death, such as skydiving
  • War or acts of terrorism
  • Your beneficiary murders you
  • Intentionally lying on life insurance application

Term life policies don’t payout if you outlive the policy’s term, such as 20 years.

What disqualifies you from life insurance?

A medical checkup is usually required to get a life insurance policy. Poor results from the exam could disqualify you, including a serious medical condition like heart disease. Nonmedical reasons that may disqualify you include:

  • Bankruptcy
  • Criminal record
  • Positive drug test
  • Dangerous hobby
  • Multiple speeding tickets

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Can I reapply if I’m turned down?

Yes, it will likely require fixing why you were denied coverage.

If you’re denied for a medical reason, you can try to improve your health in areas that caused the denial. Losing weight and lowering your blood pressure may be enough to get you approved the next time you apply.

Spend enough time driving safely, and those speeding tickets could be nonissues.

You can also apply for life insurance plans that don’t require a medical exam. You’ll still have to truthfully answer questions about any serious medical conditions you have, which may still lead to denial. If approved, the death payout may be small — $50,000 or so.

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In a nutshell

Life insurance shouldn’t be a complicated purchase. An insurance agent can help you decide what kind and how much insurance you need. You may be able to figure it out yourself, and can avoid some confusion when talking with an agent by first knowing what types of life insurance you’re interested in.

If you have a family that depends on you, or you just want to make sure your burial expenses are covered, then you may want to buy a life insurance policy. It can help protect your family from your lost income so that they can continue living without worrying about how they will pay the bills. That may be the best benefit of life insurance: knowing your loved ones will have enough money when you’re gone.

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