Chapter 5 How Much Coverage Should I Buy?

While you may think it is as simple as looking to the purchase price or tax valuation of your property to estimate how much home insurance coverage you’ll need, it is also important to determine the overall cost of rebuilding your home in the event of a total loss. There are many aspects you will need to consider to ensure you are properly protected as a homeowner. In addition to estimating the cost to replace or repair the structure of your house, you should also factor in the cost of replacing your personal possessions, coverage for living expenses if you are ever displaced from your home, and liability insurance in case anyone is injured on your property.

Determine the Overall Cost of Rebuilding Your Home

So when it comes to home insurance, how much is enough? Keep in mind, the cost of replacement is different from the stated value of a home based on purchase price, property tax evaluations, or the remaining amount of your mortgage. As noted by the Insurance Information Institute, banks will require coverage at least for the amount remaining on your mortgage, but it is still important to protect your own investment in the home. Therefore, you should consider all the costs that go into replacement when you are determining how much coverage you need for your home. This will include the interior and exterior details of your home, any special features such as crown moldings, fireplaces, archways, custom millwork, upgraded kitchens or bathrooms, and the cost of construction labor and materials in your area. State Farm Insurance advises that “[b]uilding contractors or professional replacement cost appraisers are a good source for obtaining an estimated replacement cost of your home.” Sometimes, this can be done at the same time your home is being appraised as part of the purchase process.

Every home is different and you may find the replacement cost of your home to be significantly more or less than the actual market value of your home. This is why it is important to specifically evaluate your home’s value for insurance purposes. Also, keep in mind that you should review and update your insurance policy any time you make significant upgrades to your home that may impact its replacement cost.

Also note, if you have an older home, insurance companies may not offer you a replacement cost policy. Since it may not be possible to rebuild or repair an older home with similar features and materials, home insurance companies will often provide you a modified policy that will repair or replace your older home with standard modern construction materials. However, this can vary based on the specific home insurance company. So, if you are looking to insure an older property, it is best to check with your insurance agent about their policy stipulations.

Determine the Overall Cost of Replacing Your Possessions

According to the Insurance Information Institute, most standard home insurance policies “provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure or ‘dwelling’ of your home.” The best way to assess the value of your personal belongings is to conduct a home inventory, complete with pictures and serial numbers if possible. You can then estimate how much it would cost to replace these items if they were damaged, destroyed, or stolen. You can then adjust your limits for coverage of your personal possessions as needed.

Please note that a replacement cost policy will cover the full price to replace your possessions with ones of a similar kind and quality, minus the deductible. However, if you have an actual cash value policy, home insurance companies will pay the replacement price, minus depreciation and the deductible. This means that while a replacement cost policy will increase your monthly cost of home insurance, it offers fuller protection in the event of a devastating loss.

Liability Coverage

Another important aspect included in most standard home insurance policies is liability coverage. This protects homeowners from financial loss if someone is injured while on their property. While determining how much home insurance liability protection you need is largely up to your discretion, keep in mind that increasing your liability insurance is usually relatively inexpensive. For example, many are able to go from $300,000 in home insurance liability coverage to $500,000 for only a dollar or so more a month.

However, it is important to note that homeowners can still be sued whether they have liability insurance or not. The majority of the time these cases are settled with a jury trial, with the jury almost always ruling in favor of the defendant, leaving the homeowner liable for the judgment. If you do not have coverage or do not have enough coverage, you could be responsible for paying the difference or full amount of the judgment out of pocket. Even if you cannot pay this upfront, your wages can be garnished or your assets seized and liquidated in order to pay.

If a judgment is ever brought against you as a homeowner, you can expect to have a very difficult time obtaining any property or liability insurance in the future. Even when you are able to find coverage again, your premiums will be extremely high.

In addition, if you own a swimming pool, have a certain breed of dog considered to be high risk, or host frequent social events at your home, it is advisable to carry extra liability coverage on your home insurance policy. While this will raise your average monthly cost of home insurance, it is prudent to protect yourself as fully as possible. In addition, homeowners can purchase additional protection with a home insurance umbrella policy. “The Umbrella policy goes into effect after the underlying liability limits on your homeowners or auto policy is exhausted,” according to the Farmers Insurance website. However, there are often policy requirements in order to qualify for this type of coverage, so check with your agent for specifics.

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