Features of property insurance | Insurance | Financial Literacy | Khan Academy

So let's talk a little bit more about property insurance, and in particular, what are scenarios in which it might come into effect or be relevant, and then also how you might be paid back for whatever losses you might have.

There's kind of two broad categories of bad things happening. One is something bad happens to your property itself: the house burns down, there's a flood, there's an earthquake, there's theft, things are stolen, things are vandalized. The other category is something bad happened in the house, and a Court decides that it's your fault.

This could be a situation where maybe you rent the house out to someone and you knew that there was some structural damage, but a ceiling fan still falls on that person even though you were warned. Well then, you are then— that's probably some liability that you have there, and they might have a legitimate lawsuit.

Or let's say your sidewalk has a huge tripping hazard that you knew about, and you just decided not to fix it. Someone comes and trips on your walkway or your driveway and they hurt themselves in a serious way. Maybe they could sue you—maybe they could win. You have liability there, and that could be a lot of money. It could be tens of thousands or even hundreds of thousands of dollars depending on what goes on.

So these are all situations that you want to insure yourself against. Obviously, if your house burns down, that could cost a lot of money. If someone trips and falls and hurts themselves on your property and they sue you and they win, that could also cost a lot of money. Even if they lose, just the legal expenses could cost a lot of money.

Now, the other situation is what will the actual insurance companies pay for? So if you're thinking about the property actually getting destroyed, there's two ways to think about it. They could say, "Hey, we're just going to pay to replace the property." And so there you're talking about replacement cost: what would it cost in the say to rebuild the house and then to buy the different things that you had in the house—the personal property if it's insured that you had in your house.

Another version would be cash value: what was the value of the house? Maybe they pay that. Now, the value for a house—it's very seldom that the actual land gets destroyed, and oftentimes the land is a big part of the value of the house. So even if your house burns down and if your house, let's say, is worth two hundred thousand dollars, they're unlikely to just give you the cash value of that house of two hundred thousand dollars because the land still has value.

More likely you're going to be dealing with replacement costs. Now, another thing that usually an insurance policy will cover is if, heaven forbid, your house burns down or any of these bad things happen, you're going to need another place to live. So there's this notion of additional living expenses: if you need six months someplace else to live while your house gets repaired or a year someplace else to live while your house gets repaired, then that might be covered as well.

So these are all things to look into when you get property insurance.