The best way to protect your home and your important household investments from theft, flood, or any human-induced or natural disaster is to get a proper home insurance policy. A homeowners insurance can help you rebuild, replace, or defray costs in case of liability to others. How much do you really need to be adequately covered? This article helps you arrive at a good estimate about the amount of homeowners insurance coverage you should get.
Typically, your standard homeowners insurance policy provides six types of coverage:
|Dwelling||provides coverage for the home itself and any structures attached to it|
|Personal possessions||provides coverage for any of your stolen possessions even when they are not in your home|
|Loss of use||pays for your food, lodging, and other living expenses when you are on the period of rebuilding and your home is rendered temporarily uninhabitable|
|Personal liability||A financial buffer for when you’re sued as a result of incurring damage to other’s property or causing personal injury|
|Medical payments||foots the medical bills of an individual who is injured on your property|
|Other structures||compensates for the damage to any structure not attached to your home|
Out of these types, the bulk of your insurance cost is determined by two coverages: dwelling coverage and personal possessions.
Standard homeowners insurance policies readily provide compensation for damage due to fire, lightning, hail, explosions, etc. However, if you live in an area that is prone to flooding or is near a fault line, see to it that you get the right coverage for flood or earthquakes. If you are not sure if you are at risk, visit your local government agency to get information. The important thing to remember is that you should have a policy with enough coverage to compensate for the cost of rebuilding your home.
If you limit your insurance policy based on your mortgage, chances are the coverage may be lesser than the cost of rebuilding. You may also use the market price of your home which is more or less the same as the potential cost of rebuilding, though basing the amount of coverage using this can be inaccurate by a large margin. A home appraisal might be needed to determine the current value of the home.
Typically, there are two factors that impact the cost of rebuilding: (a) the local cost of construction and (b) the square footage of the structure. To arrive at an estimate, multiply the structure’s square footage (b) by the local, per-square-foot building costs (a).
The style of the home, its interior, and overall design and special features may also add up and contribute to the cost of rebuilding.
Other important considerations include:
If you live in an area that issues building codes, know that these rules are updated from time to time. If you don’t know that there’s been changes to the established rules and your home was damaged, your standard policy may not pay for the extra cost of rebuilding to fit the new laws.
To guard yourself against this risk, you can get an endorsement to your policy called Ordinance or Law. This coverage will compensate for the cost of rebuilding to the tune of the new coding rules.
Age of the property
Most older homes have special features that are expensive to replace. If your home belongs to this category and it was damaged, your standard homeowners insurance may not be able to cover the total cost of replacement. In this kind of situation, the owner of an older home should be able to get a modified replacement policy which could compensate for the reconstruction of the property to its original features.
Like any economic product, construction cost can ramp up through the years due to inflation. After a disaster hits and your property was damaged, you may be surprised to find out that the amount of your insurance is now falling short of the total cost of rebuilding.
To protect yourself from this burden and source of anxiety, you may purchase either:
1. A guaranteed cost replacement policy which will cover the cost of reconstruction including inflation
2. An extended replacement cost policy which will pay you 20 percent more on top of your insurance policy limits
Personal Possessions Coverage
Experts suggest that 50 to 75 percent of your dwelling coverage is a good estimate for your personal possessions coverage.
But is it really enough?
The best way to determine how much coverage you should get is to conduct an inventory of your possessions. This includes expensive gadgets, appliances, furnitures, jewelry, etc. Your inventory should include the serial numbers of all items, if possible, and their purchase price. This inventory will help the process of claims easier in case you will be placed in the situation to do so.
When it comes to personal possessions, there are two types of coverage you can choose from:
– Actual cash value coverage where you get compensated for the cost of the items based on how old they are. Actual cash valueis equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation.
– Replacement cost coverage which would pay for the actual purchase cost of the items. The replacement cost is usually calculated using the initial price tag paid for the items regardless of any potential depreciation.
Do I need something else?
What isn’t recommended doesn’t mean it isn’t needed. If your provider doesn’t tell you to get flood insurance coverage, it doesn’t mean you shouldn’t get one. Just recently, the cyclones that hit major parts of the US have left thousands of households helpless without the proper flood insurance coverage. In the middle of a disaster, the last thing you need is worrying about the cost of rebuilding especially if you’re still paying your mortgage.
Another cost to consider is your deductible. In a nutshell, the deductible is the money you have to pay from your own wallet every time you submit a claim on your policy. The higher the amount you pay on your deductible, the lower your premium will be.
When calculating the amount of coverage you’d need, your provider would usually help you arrive at a figure. However, there’s no cookie cutter formula for a precise estimation. It helps to have a background about where the costs are coming from and how it is calculated to be able to get a more reliable number.