Paying for more homeowners insurance than you need is a waste of money, but it can prove even more costly to get caught without enough coverage.
What you need is “just the right amount” of coverage. Here’s how to get it, and it shouldn’t take more than 4 or 5 hours of your time spent reviewing your homeowners insurance policy, talking to your agent, and doing a little research.
Review Your Coverage
All homeowners insurance isn’t created equal. That’s why it pays to review your coverage every year to ensure your policy meets your changing needs. Begin by understanding the types of coverage available.
Actual cash value coverage reimburses you for the value of your home based on its current condition. If your home was built 10 years ago, you’d receive only the depreciated value of decade-old windows, cabinets, appliances, and so on.
Most insurers recommend the more comprehensive replacement cost coverage. With it, you’ll be reimbursed for the amount it will cost to rebuild your home like new with the same kind and quality of materials. Depreciation doesn’t factor into the settlement equation.
To get the full benefit of replacement coverage, you need to purchase enough insurance to cover the total cost to rebuild your home, excluding the value of the land. Many people make the mistake of insuring at the market value. But the amount you could sell your home for today isn’t necessarily the same as how much it would cost to rebuild.
Construction Costs Are a Big Factor
Look to current construction costs in your local area for guidance. If you’ve purchased a newly constructed home in the past year, you already have the answer. The same is true if you’ve refinanced within the past year. You almost certainly paid for an appraisal during that process that likely includes three valuations: replacement cost, market value, and actual cash value.
If you’re determining replacement cost without those head-starts, call several local homebuilders and ask the average square-foot construction cost in your area. If the going rate is $175, and your home is 2,000 square feet, you’d purchase $350,000 in coverage. For just a few bucks you can also order a valuation report online at a website like AccuCoverage ($7.95) or Home Smart Reports ($6.95).
Remember that any time you spend at least 5% of your home’s value on a remodeling project—or $5,000, whichever is less—you should contact your insurer to increase your coverage.
Valuables and Liability
Be sure you’re insured at the right value for your home’s contents and for personal liability. Most insurance polices provide only actual cash value on contents. To get replacement cost coverage, you’ll need to purchase an endorsement. If you have valuables not covered by your policy—silverware, jewelry, furs—purchase endorsements for those, too.
Many people pay no attention to the liability coverage limits in their policies, but that’s a mistake. If you have a dinner party and a guest falls down your front steps, you don’t want to be underinsured. In recent years the average liability claim for bodily injury and property damage has been $15,854. You can often times increase your liability coverage by several hundred thousand dollars for just $10 to $15 more per year.