When a house has so much damage that you're better off starting over, the insurance agency calls that a total loss. Although we've never had that happen to any of our clients, with the recent natural disasters, we decided to get familiar with the process.
So what's the process if your house is a total loss? Does it get paid off? If so, who gets that money? Do you have the option to pay off your mortgage? Can you keep your old mortgage for a new house if the interest rate is great?
Additional Living Expense
Almost as soon as you file a claim for a disaster, you get some money for what the insurance industry calls Additional Living Expense, or A.L.E. Frequently, that's a few thousand dollars, but every situation is unique.
What A.L.E. Can Do for You
Once you get that money, you start turning in receipts to get reimbursed. So you're never out of pocket any money, but they also never pay out your policy all at once. Most of the time you can get that money for either 12 to 24 months, until it's gone, or until you're no longer in the situation. Whichever comes first.
The whole point of the A.L.E. is to cover the cost involved in paying for two residences. The bank still wants their mortgage, even though your house is uninhabitable.
So you are paying rent at an apartment on top of your mortgage, and that additional expense is covered by A.L.E. It will also pay for things like utilities, food, and possibly even gas if you're having to drive further to work.
But it's not free money.
The primary reason for A.L.E. is to help you with paying on two residences.
Therefore, as soon as you pay off your mortgage,
the A.L.E. money stops.
Let's say your policy says you get up to $100,000 for the personal property inside your home. You're not going to get a check for $100,000. You'll have to turn in a written inventory of what you owned and its value. So, if you own a couch and a dishwasher for a less than $100,000 but were covered for up to $100,000, you're not going to get a check for $100,000.
Exceptions to the Rule
Now, if you're part of some major disaster, some insurance companies will just write checks for everyone for the policy limits. That makes sense for them from a business standpoint in those cases. But if it's something that just happened to you, or was a very limited scale of damage, they're going to look to your inventory to gauge level damage.
Personal Property Payment
As far as payment goes, Personal Property works roughly the same way that A.L.E. does. You get some initial money, then you buy, turn in receipts, and get reimbursed. You're not using your own money necessarily. You're using the money they give you, but like A.L.E., don't expect them to give it to you all at once.
When it comes to interest rates, it may be advantageous for you to not pay off your mortgage. Maybe the rates have gone up, so you wouldn't want to pay it off and get a new mortgage at a higher rate.
The process of paying of your mortgage, however, depends completely on your mortgage company. If they let you keep the lower rate mortgage, you can. In that case, you just take your money from the insurance company, and start using that to fund your new home. It's a more complicated than that, but that's essentially how the mortgage process can work.
After reading this, do you feel that you are adequately prepared for a total loss? Are you with the right agent to help you? If you'd like to talk about your insurance company, contact us. We'll see if it makes sense for us to have a conversation about it.
SEE ALSO: Do You Need Renter's Insurance?