How do home insurance companies pay out claims?

A homeowner’s insurance policy pays for losses or damage to your property if something unexpected happens. Once the insurance company sends an adjuster and evaluates the damage to your home, they pay a settlement amount in either replacement cost or actual cash value, depending on the provisions in your insurance policy.

Replacement cost gives you money to cover the costs to rebuild your home or repair damages using similar materials or achieving similar quality at today’s prices. Actual cash value gives you money to repair or rebuild based on the value of your home, considering its age and condition or market value. Keep in mind that the actual cash value of your home may not match the replacement cost. The materials and labor needed to replace your home or parts of your home often cost more than the actual cash value.

When can I use the money from my insurance payment?

Your homeowner’s insurance company generally pays your settlement with a check made out to both you and your mortgage servicer or lender. Most mortgage agreements require this to protect the lender’s interest. Typically, your servicer releases a portion of the settlement money before work begins so you can hire a contractor. As the work progresses, the servicer typically releases more money. The rest is released once the job is finished and the home passes inspection.

If you have a mortgage, you are still responsible for making your payments while your insurance claim is paid out. Learn what to do if you’re having trouble making mortgage payments because of a disaster or other emergency.

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