Your mortgage loan requires it. Your financial advisor claims you need more of it. And, if your home is destroyed or your property is stolen, you'll be glad you had it. Without adequate home insurance coverage, expect to pay out of pocket for damages and replacement costs.
Understanding the need for home insurance is one thing, but figuring the coverage you need is another. Too little coverage can put you at financial risk, and too much, while lowering your risk, can strain your finances. Calculating the right amount of homeowner's insurance isn't as easy as recalling the price you paid for your home. Coverage needs will vary based on several factors, some of which you can control. Before you shop for your next homeowner's insurance quote, take a few minutes to consider your insurance needs.
Where You Live Matters
Dwelling coverage is the part of an insurance policy that covers the cost to repair or rebuild the physical structure of the home. A property's geographic location can influence dwelling coverage minimums, limits, and annual premiums.
The repairs or replacement costs for a four-bedroom ranch-style home in Michigan will likely differ from a similar home in Texas. Construction and material cost to rebuild or repair may vary by city or state.
Market Value is Nice, But...
Home values are on the rise, but using market value to determine the correct amount of dwelling coverage would be a mistake. It often costs more to rebuild an existing home than to build a new home. The former is a more labor-intensive endeavor that doesn't have the benefit of a lower-cost resources available with larger projects, such as when building a master-planned community.
Use this simple formula to estimate the cost to rebuild your home.
Carry coverage limits at least equal to the estimated cost to rebuild.
Disaster Struck, Now What?
If your home flooded, where would you live during reconstruction? How would you pay for it? Additional Living Expense (ALE) coverage is limited to approximately 30% of the dwelling coverage. The time to rebuild your home will often take months. Consider temporary housing scenarios to estimate living expenses.
What's Inside Matters
Dwelling coverage may offer limited personal property coverage. In the event of property theft, you may be able to recoup the cost of items.But, unless you've performed a personal inventory of your possessions, it's challenging to determine if you have enough coverage.
Create a home inventory by making a list of all of the contents of your home, noting the replacement cost of each item. Insurance policies may offer either actual cash value or replacement cost coverage for your personal property. It's possible to use up to 50% of your total dwelling coverage amount to pay for personal property losses.
It was All Fun and Games, Until...
A backyard pool party with friends can be the beginning of an ongoing legal battle. No, it doesn't need to be that dramatic, but if someone hurts themselves on your property, they may file a claim for medical damages. Personal liability coverage can provide financial protection against accidents that occur at your home, which involve another person or their property. Policy limits vary.
Speak with a trusted insurance professional to help determine the right amount of coverage for your unique situation and budget.