Determining the amount of homeowners insurance you need is very important, and a common problem resulting in homes being underinsured. To avoid the financial hardship of underinsurance in the case of a disaster, determine the cost to replace your home with all its contents. Then, purchase a homeowners policy that meets your needs.
Homeowners Insurance Coverage
A major purpose of homeowners insurance is to cover the costs of repairing, rebuilding, or replacing your home in the event of damage. The baseline coverage you need should be sufficient to replace the home if it becomes uninhabitable.
Calculate these costs by multiplying your home’s square footage by the costs per square foot to reconstruct in your local area. This gives you a rough estimate, which you can verify by consulting a contractor or by using a construction cost calculator.
As a matter of caution, it’s better to insure above your estimate rather than looking for a policy that matches it closely. For example, if the rebuilding estimate is $250,000, it’s better to insure your home for $300,000.
You may be underinsured if you have not accounted for:
- Changes to the cost of local labor: The wages paid to construction workers make up a large part of the cost of rebuilding or repairing a home. These wages may increase over the years or under specific circumstances, such as increased demand for a specific skill.
- Updated building codes: Homes built to older building code standards may require updated construction to bring them up to new building codes in the event of repairs or rebuilding, which may increase the cost.
- Additions or renovations: If extra rooms have been added or significant changes have been made to the home, this needs to be reflected in your rebuilding estimate.
- Adjustments in material costs: Cost of materials to repair or rebuild a home may fluctuate. Make sure your insurance coverage is sufficient for the materials needed.
- Unique home features: Older homes may have unique architectural features that are difficult or expensive to duplicate. In these cases, additional coverage may be required to replace the classic features of the home.
Coverage for Personal Possessions
A basic homeowners insurance policy should include coverage for your personal possessions. Without this type of coverage, any personal possessions inside the home would not be eligible for repair, replacement, or compensation.
It’s common for homeowners insurance policies to offer some coverage for personal belongings inside the home. Typically, the coverage for personal belongings ranges from 50-70% of the coverage for the dwelling.
To get a sense of whether the contents coverage of your homeowners policy is sufficient, quantify your possessions. Record your most expensive personal items first, noting their current value and their replacement cost if the item were ruined beyond repair. These things would likely include electronics, jewelry, large appliances, and major furnishings.
Look closely at any homeowners insurance policy to confirm whether there are limits placed on certain types of items. For example, the policy may place a cap on payments for jewelry or electronics. The caps should be high enough for you to reasonably repair or replace these items.
The next category is general household items. Estimation of the total current value of these items and their replacement cost is sufficient, as long as you have a general understanding of their value.
Also, check your homeowners policy to see if the contents coverage applies to items within your home used for commercial purposes. If you work from home or carry company-owned equipment to your home, these items may not be eligible for coverage in some cases.
After creating a working inventory of the possessions within your home, you can more accurately judge if your homeowners policy offers enough coverage for your personal possessions. Furthermore, check to see if the policy offers coverage based on the current value or the cost of replacement.
Additional Living Expense Coverage
Most standard homeowners insurance policies include coverage for additional living expenses (ALE) or loss of use. If your home requires extensive repairs or rebuilding because of covered damage, it’s important that the policy also provides for living expenses while repairs are made to your home.
The recommended coverage for additional living expenses is 10-30% of your home replacement coverage or 1-3 months of your normal living expenses.
Liability insurance is coverage for accidents in the home or on your property for which you are liable.
Examples of situations where liability insurance may cover a loss include:
- Accidents on your property.
- Damage to people or property from falling trees.
If you have a mortgage, your mortgage provider may require liability insurance. And in some local areas, liability insurance may be a requirement for all homeowners.
However, liability insurance is recommended for all homeowners for protection against devastating financial costs in the event of serious damage or injury to someone on, or because of, your property. If you work from home, have a high net worth, or face a higher risk of lawsuits, liability insurance is extremely important.
Most homeowners insurance policies provide a minimum of $100,000 of liability insurance, but higher amounts are available.
Covering the Gaps
Homeowners insurance does not cover damage to a home or contents under all circumstances. Common circumstances that are not covered by standard home insurance include:
- Insect or animal damage (termites, birds, bats, etc.).
- Damage from acts of war.
- Normal wear and tear.
- Intentional home damage.
Consider carrying additional insurance to cover the gaps in your homeowners insurance. For example, homeowners often purchase a flood policy, since flooding is not covered by their homeowners policy.
An umbrella policy is very useful for many homeowners needing coverage above that provided by a standard homeowner policy. Check with your agent about the benefits of an umbrella policy related to your particular circumstances.
ABC Dennis Insurance
ABC Dennis Insurance is an independent insurance agency established in 1997 that provides homeowners insurance to its customers. If you have not reviewed your insurance coverages this year, please call our office at (813) 949-7765 or email us.
Besides homeowners insurance, we can help with all your insurance needs. As an independent agency, we find the best insurance coverage with the most competitive rates.
How to Insure Your Home (Wall Street Journal)
How Much Homeowners Insurance Do I Need? (Insurance Information Institute)