How Much Coverage Do I Need on My Home?
What’s one of the greatest risks you can take when buying homeowner’s insurance?
Not buying enough.
Unfortunately, three in five Americans are underinsured– and aren’t even aware of it. It’s vital to have an appropriate amount of coverage for your home so you can rely on it when you need it most.
What Should My Homeowners Insurance Cover?
Put simply, you want a homeowners policy that is able to cover the following:
- Rebuild your home (extended dwelling coverage)
- Replace your items (personal property)
- Cover any injuries and damages that happen on your property (liability)
- Reimburse your living expenses after the loss of an insured home (additional living expenses)
Many homeowners are confused about how much coverage they need. That confusion often stems from the difference between the market value and the replacement cost of your home.
The market value of your home is determined by your location, neighborhood, desirability, etc., whereas the replacement cost is what it would actually cost to rebuild your home if it were to completely burn to the ground (or any other total loss).
While they could be seen as similar numbers, they can be two very different things. While it may cost $300,000 to rebuild a home in terms of materials, the location and desirability of that home can bump the market value up to $500,000.
Which leaves you paying $500,000 but only insuring for $300,000.
How to Determine How Much Coverage You Need on Your Home
The current market price of your home can be more or less than the cost to rebuild. If your insurance policy is limited by your mortgage, it may not adequately cover the cost of rebuilding, which is why it’s important to educate yourself on an appropriate coverage limit.
This can be found by going through the replacement cost estimator process. A replacement cost estimator is a software program that looks at the features and building materials of your home, runs them through an algorithm, and provides you with an estimate on what it would cost to replace your home. This gives you a solid foundation on which to decide your coverage amounts.
As a rule of thumb, you want to be as close to 100% of the replacement cost of your home as possible when you purchase a homeowners insurance policy.
If you have any questions about your current homeowners insurance policy or are looking to increase your coverage, please feel free to give us a call.