One of the biggest risks you can take with regard to your home is not buying enough insurance. Three out of five families in the U.S. are underinsured, some by as much as 20%. On average, 6% of home owners make a claim per year, and although that may not sound like a lot, the average payout is close to $11,000. Home owners insurance covers everything from fire and weather damage to theft. Having the right amount of coverage is critical to protect your investment. But what’s the right amount? Here’s what you need to know.
When purchasing home insurance, you should have enough to
∙ Rebuild your home (dwelling coverage)
∙ Replace your belongings (personal property)
∙ Cover injuries and damages that happen on your property (liability)
∙ Reimburse your living expenses after the loss of an insured home (additional living expenses)
How Much Dwelling Coverage Do I Need?
Dwelling coverage is the amount needed to replace the cost of your home if it needed to be completely rebuilt. Think of your dwelling as the structure of your home, all materials needed to build it, and anything attached, such as a garage, deck, or porch. A good insurance agent will explain how this coverage is calculated. Basically, it is the square footage of your home multiplied by local construction costs.
Factors that affect replacement costs:
New building codes that went into effect after your home was first built. Building codes change over the years. Your coverage needs to account for increased costs to meet new codes.
Remodeled kitchens that include quartz or granite countertops, stainless steal appliances, and premium cabinetry and flooring. Whenever you update your home, adjust the replacement cost to reflect the added value.
Additional rooms and structures (bedrooms, garages, screened in porch) that you’ve built since your initial purchase. If something happens to your home and you’ve not added in the coverage for these changes, you’ll be paying for these structures all over again.
Rising prices of construction and building materials. The cost of bricks, timber, and other supplies in high demand usually increase every year, as well as the wages to pay builders.
Crafted, older structures that are hard to replace and require special carpentry skills. Count on the expertise to build elegant ceiling molds or arched windows to cost more.
How Much Insurance Do I Need for Personal Belongings?
Insurance for personal property loss includes everything from furniture and appliances to clothing and bicycles. It does not include motor vehicles as these items are separately insured. To properly estimate the value of your personal property, make a full inventory list, separating out your most expensive items, and assign a replacement value to them. For expensive jewelry, musical instruments, furs, or any other high-cost item, you may want to ask your insurance agent if you need an additional policy for coverage.
How Much Liability Coverage Do I Need?
If someone gets hurt on your property—slips and falls, trips, breaks a leg—liability coverage protects you from getting hit with major medical bills and lawsuits. Most policies offer $100,000 in liability, but it’s wise to purchase $300,000 to $500,000 for protection. No one expects someone to get hurt on their property, but if it happens, it can get quite expensive. Policies vary on incidents involving your dog, so make sure you know your risks.
Do I Need Additional Living Expenses?
If disaster struck your home and there was nothing left, you’d need a place to live while the home is rebuilt. That could take months. Additional Living Expenses (ALE) is like an emergency fund that covers your living costs while the home is under construction. Most policies use a percentage of your dwelling coverage to calculate ALE, usually between 20-30%.
Do I Need Flood Insurance?
We’ve seen many regions of the country devastated by flood in recent years. It’s critical to have a flood insurance policy if you live in a flood zone. Although it’s expensive, it’s not something to skip if you’re at risk since a flood can destroy everything you own. There are many resources online to help determine if your home is in a flood zone, or consult with a local insurance agent.
Final Tip
One of the most common mistakes home owners make is not reviewing an old insurance policy. With increased value in your home, your coverage may be outdated. In other words, you might not have enough coverage. If you haven’t updated your policy in a while, consult with your agent.