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How much homeowners insurance do I need?
You need enough
insurance to cover the following:
- The structure of your home.
- Your personal possessions.
- The cost of additional living
expenses if your home is damaged and you have to live elsewhere during
repairs.
- Your liability to others.
The structure
You need enough insurance to cover the cost of
rebuilding your home at current construction costs. Don't include the
cost of the land. And don't base your rebuilding costs on the price you
paid for your home. The cost of rebuilding could be more or less than
the price you paid or could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount
of your mortgage. If the limit of your insurance policy is based on
your mortgage, make sure it's enough to cover the cost of rebuilding.
(If your mortgage is paid off, don't cancel your homeowners policy.
Homeowners insurance protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the
total square footage of your home by local building costs per square
foot. To find out construction costs in your community, call your local
real estate agent, builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
- Local construction costs
- The square footage of the structure
- The type of exterior wall
construction–frame, masonry (brick or stone) or veneer
- The style of the house (ranch,
colonial)
- The number of bathrooms and other
rooms
- The type of roof and materials used
- Other structures on the premises
such as garages, sheds
- Fireplaces, exterior trim and other
special features like arched windows
- Whether the house, or parts of it
like the kitchen, was custom built
- Improvement to your home–adding a
second bathroom, enlarging the kitchen or other additions that have
added value to your home
Standard homeowners policies provide coverage for disasters such as
damage due to fire, lightning, hail, explosions and theft. They do not
cover floods, earthquakes or damage caused by lack of routine
maintenance.
Flood insurance is available from the Federal Insurance Administration
( http://www.fema.gov
) and earthquake coverage is available from private insurance companies
or, in California, also through the California Earthquake Authority ( http://www.earthquakeauthority.com
)
Replacement cost policies
Most policies cover replacement cost for damage to the structure. A
replacement cost policy pays for the repair or replacement of damaged
property with materials of similar kind and quality. There is no
deduction for depreciation–the decrease in value due to age, wear and
tear, and other factors.
If you purchase a flood insurance policy, coverage for the structure is
available on a replacement cost basis.
Guaranteed or extended replacement
cost coverage
After a major hurricane or a tornado, building materials and
construction workers are often in great demand. This can push
rebuilding costs above homeowners policy limits, leaving you without
enough money to cover the bill. To protect against such a situation,
you can buy a policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or
more above the limits, depending on the insurance company. A guaranteed
replacement cost policy will pay whatever it costs to rebuild your home
as it was before the fire or other disaster.
Building codes
Building codes are updated periodically and may have changed
significantly since your home was built. If your home is badly damaged,
you may be required to rebuild your home to meet new building codes.
Generally, homeowners insurance policies (even a guaranteed replacement
cost policy) won't pay for the extra expense of rebuilding to code.
Many insurance companies offer an Ordinance or Law endorsement that
pays a specified amount toward these costs. (An endorsement is a form
attached to an insurance policy that changes what the policy covers.)
Inflation guard
Consider adding an inflation guard clause to your policy. This
automatically adjusts the dwelling limit when you renew your policy to
reflect current construction costs in your area.
Older homes
If you own an older home, you may not be able to buy a replacement cost
policy. Instead, you may have to buy a modified replacement cost
policy. This means that instead of repairing or replacing features
typical of older homes, like plaster walls and wooden floors, with
similar materials, the policy will pay for repairs using the standard
building materials and construction techniques in use today.
Insurance companies differ greatly in how they insure older homes. Some
won't insure older homes for the replacement cost because of the
expense of re-creating special features like wall and ceiling moldings
and carvings. Other companies will insure older homes for the
replacement cost as long as the dwelling is in good condition.
If you can't insure your home for the replacement cost or choose not to
do so–in some cases, the cost of replacing a large old home is so high
that you might not want to replace it with a house of the same
size–make sure the limits of the policy are high enough to provide you
with a house of acceptable size and quality.
Your personal possessions
Most homeowners 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 limits of the policy typically appear on
the Declarations Page under Section I, Coverages, A.
Dwelling.
To determine if this is enough coverage, you need to conduct a home
inventory. This is a detailed list of everything you own and
information related to the cost to replace these items if they were
stolen or destroyed by a disaster such as a fire (for more information
see How
do I take a home inventory and why?). If you think you need
more coverage, contact your agent or insurance company representative
and ask for higher limits for your personal possessions.
Replacement Cost or Actual Cash Value
You can either insure your belongings for their actual cash value,
which pays to replace your home or possessions minus a deduction for
depreciation up to the limit of your policy. Or you can opt for replacement
cost, which pays the actual cost of replacing your home or
possessions (no deduction for depreciation) up to the limit of your
policy.
Suppose, for example, a fire destroys a 10-year-old TV set in your
living room. If you have a replacement cost policy for the
contents of your home, the insurance company will pay to replace the TV
set with a new one. If you have an actual cash value policy, it
will pay only a percentage of the cost of a new TV set because the TV
has been used for 10 years and is worth a lot less than its original
cost. Some replacement cost policies also replace the item and deliver
it to you.
Generally, the price of replacement cost coverage is about 10 percent
more than that of actual cash value. If you need a flood insurance
policy for your belongings, it is only available on an actual cash
value basis.
Insuring expensive items with
floaters/endorsements
There may be limits on how much coverage you get for expensive items
such as jewelry, silverware and furs. Generally, there is a limit on
jewelry for $1,000 to $2,000. You should ask your agent or look it up
in your policy. This information is in Section I, Personal
Property, Special Limits of Liability. Insurance companies may also
place a limit on what they will pay for computers.
If the limits are too low, consider buying a special personal property
floater or an endorsement. These allow you to insure these items
individually or as a collection. With floaters and endorsements, there
is no deductible. You are charged a premium based on what the item (or
collection) is, its dollar value and where you live.
You can determine the value by providing your agent with a recent
receipt or getting the item or collection appraised.
Additional living expenses after a disaster
This is a very important feature of a standard
homeowners insurance policy. This pays the additional costs of
temporarily living away from your home if you can't live in it due to a
fire, severe storm or other insured disaster. It covers hotel bills,
restaurant meals and other living expenses incurred while your home is
being rebuilt.
Coverage for additional living expenses differs from company to
company. Many policies provide coverage for about 20% of the insurance
on your house. Some companies will even sell you a policy that provides
you with an unlimited amount of loss of use coverage, for a limited
amount of time.
If you rent out part of your house, this coverage also reimburses you
for the rent that you would have collected from your tenant if your
home had not been destroyed.
You should talk to your agent or company to make sure you know exactly
how much coverage you have and how long the coverage will be in effect.
In most cases, you can increase this coverage for an additional premium.
Liability to others
This part of your policy covers you against lawsuits
for bodily injury or property damage that you or family members cause
to other people. It also pays for damage caused by pets. It pays for
both the cost of defending you in court and for any damages a court
rules you must pay.
Generally, most homeowners insurance policies provide a minimum of
$100,000 worth of liability insurance, but higher amounts are
available. Increasingly, it is recommended that homeowners consider
purchasing at least $300,000 to $500,000 worth of coverage of liability
protection.
Umbrella or Excess Liability.
You should buy enough liability insurance to protect your assets. If
you own property and or have investments and savings that are worth
more than the liability limits in your policy, you may consider
purchasing an excess liability or umbrella policy.
Umbrella or excess liability policies provide extra coverage. They
start to pay after you have used up the liability insurance in your
underlying home (or auto) policy. An umbrella policy is not part of
your homeowners policy. You have to purchase it separately. In addition
to providing a higher dollar amount, they offer broader coverage. You
are covered for libel, slander, and invasion of privacy. These things
are not covered under standard homeowners or auto policies.
The cost of an umbrella policy depends on how much underlying insurance
you have and the kind of risk you represent. The greater the underlying
liability coverage, the cheaper the policy. This is becaue you would be
the less likely to need the additional insurance. Most companies will
require a minimum of $300,000 on your home and your car, if you own one. |
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