How much homeowners insurance is enough?

Of all insurance lines, homeowners is the area where we typically get the most pushback from clients and potential clients. The most misunderstood aspect of it deals with the amount of insurance. A recent survey revealed that most folks don’t understand how their homeowners insurance works, and I believe it. Market value and mortgage amount are often given to me as the amount of coverage to place on a home. Problem is, market value and mortgage amount matter very little to the insurance company. If you want a replacement cost policy, you have to insure your home for its replacement value.

The cost to rebuild your home is its replacement value. This can be very different from the estimated market value, actual purchase price, or even new construction price. In most cases, it costs more to rebuild the home you own than to buy a new one. Why is that? Well, unless the fire or tornado levels the entire home and clears the lot, most likely there will be demolition and site prep before construction can begin. This is an important insight into why your Dwelling (Coverage A) limit is so important.

Deciding How Much Insurance is Enough

Your agent can work with you to estimate the replacement cost for your home and to adjust your policy limits from time to time as needed. Cost of construction fluctuates, so it is important to evaluate this number on an annual basis. You also need to make adjustments if you make additions or improvements to your home.

When talking to your agent, it is critical that you provide them with accurate, updated information about your home and contents. If your dwelling limit accurately reflects your home’s true replacement cost, some companies will pay more than the limit if a covered loss is greater than the limit on your policy. Ask if a Home Replacement Guarantee or Extended Dwelling Coverage is available in your state.

How can you be sure you have enough?

Here are some steps you can take to reduce the danger of being seriously underinsured:

· Call your agent. If you have questions or concerns about the limits in your policy, ask them to show you how those amounts were calculated. This will also give you an opportunity to make them aware of any overlooked information.

· Read your policy. Certain property, such as jewelry, and certain perils, such as earthquake or flood, are better insured separately. Knowing what is covered and for how much will help you insure properly. If there is anything in your policy you don’t understand, contact your agent and ask for an explanation. · At each annual renewal of your policy, you receive a new Policy Declarations page showing limits of coverage and optional coverages. Review this information. If you do any significant remodeling or add a family room, extra bedroom or bathroom, etc., tell your agent about these changes so your coverage limits can be adjusted to cover the improvement.

· Consider carefully whether your policy provides all the protection you need. Does it provide coverage for extra costs resulting from building code changes? Does it automatically increase coverage limits annually to keep pace with inflation? Does it provide additional funds if the cost of rebuilding your home exceeds the policy limits?

· Does your policy include replacement cost coverage for contents (clothing, furniture, appliances, and other personal property inside your home)? If not, you can add it by endorsement. The cost is small, but the protection valuable. Replacement Cost Coverage pays for losses to your possessions at the cost of brand new items. Without this option, a covered loss to your personal possessions would be depreciated by their age and condition, reducing the size of your claim settlement.

· If you have an art collection, antique furniture, jewelry, or other valuable possessions, talk to your agent about supplemental coverages to adequately protect your investment in these items. The cost is modest for the extra protection, and often the deductible is waived.

· Consider whether you should have more coverage for personal property (contents) than your policy provides. Personal property coverage is usually 50% – 70% of the coverage limit for the structure. Your limit may be lower. Supplemental protection is available for a small additional premium.

· Prepare an inventory of personal property items, update it periodically, and keep it in a safe place outside your home, such as a safe deposit box. It will save you hours of time trying to list everything damaged or destroyed if you need to make a claim. It will also help ensure you don’t forget some items. Your agent can advise you on ways to simplify the job of preparing a personal property inventory such as videotaping each room with descriptive information on the sound track.

· Besides making sure you have enough protection to cover possible damage to your own home and contents, you should also evaluate your exposure to liability risks. These result from damage to the property of another, or injury to a person, not a member of your household, for which you can be responsible. In recent years it’s become common for homeowners to be sued for injuries or damages to others, even when there is no evidence of negligence by the homeowner. The reality today is if you have any appreciable assets, you are exposed to the risk of being sued. Even if you ultimately prevail in court, your legal fees and the months or years of worry and uncertainty can be a terrible burden on you and your family. The Personal Liability coverage provided by your Homeowners Policy usually provides a limit of $100,000 or $300,000. It is very easy to increase this amount with a personal umbrella policy. Not only will it increase your personal liability, but also your auto liability. Limits are available starting at $1 Million with premiums in the neighborhood of $150 a year.

This post is meant to offer a basic understanding of how much homeowners insurance you need. However, we all know that nothing is basic when you have a claim, so consult with an agent in your area for more information. The information in this post is in no way meant to represent all issues that can arise or address specific coverage situations. Consult your own policy to determine how it would react to any situation.

Thanks for listening.

©2009 – Andy Dillow – Modified from original post at http://theinsdude.com