How Much Home Insurance Do I Need?

Fran
Leonardo Castro
October 8, 2020

Buying a home is a monumental achievement. It may be the largest purchase in a person’s life and often is. For homeowners, home insurance is something that is very familiar. Many homeowners have home insurance to protect their homes from a possible disaster or accident. With home insurance you can replace and/or rebuild your home and belongings as long as you have enough insurance to cover the cost and if the damage or loss was caused by a covered peril. Many homeowners will ask themselves how much home insurance they need in order to cover their belongings. There are different types of coverages and policies. Typical home insurance covers the following accidents:

  • Damage from an aircraft, car, or vehicle
  • Explosions
  • Falling objects
  • Fire and smoke
  • Lightning
  • Riots or civil commotion
  • Theft
  • Vandalism and malicious mischief
  • Volcanic eruptions
  • Water damage (from within the home only)
  • Weight of ice, snow, and sleet
  • Windstorms and hail

Homeowners insurance does not cover flood and earthquake damage. You must buy separate Flood Insurance and Earthquake Insurance policies to be covered for these natural disasters.

How Much Insurance Do I Need?

Below are some guidelines to help homeowners determine how much coverage they need to protect their homes:

To determine which type of coverage to buy, first consider the possible types of disasters that could occur in or near your home.

A standard home insurance policy covers the most common types of disasters, but you may want to buy coverage that protects heating and cooling systems in your home or insurance that will cover sewage and backup problems. You may also have detached structures that you want covered. Also, it’s important to look at the contents portion of your home insurance to see if the limits are high enough, especially if you have items in storage.

People who own homes in earthquake-prone areas or flood zones should buy a separate policy for flood and/or earthquake. that covers those disasters.

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What Does the Liability Portion of a Homeowners Insurance Policy Cover?

The liability coverage on a homeowners insurance policy covers anyone that gets hurt on your property. The most common liability claims are for dog bites, home accidents, falling trees, intoxicated guests and injured domestic workers.

Make sure the liability coverage limits on your policy cover these sorts of incidents. If you are a high net-worth individual, make sure your limits are high and consider buying an umbrella liability protection. One lawsuit can damage you financially otherwise.

What’s Personal Property Coverage?

Personal property coverage is insurance that covers everything inside the house, even items in storage if you keep that in your inventory, such appliances, clothes, furniture, etc. With this type of coverage you’ll need high enough limits to cover and replace all your belongings. You’d be surprised by how quickly your items add up if you have to replace them all. This is why you should take inventory of their personal possessions to have an idea of what value to set for contents coverage. This list of inventory also serves as a convenient record which helps file for a claim much easier. It can help you decide if you need additional coverage, such as riders for expensive jewelry or equipment in the home. However, remember that the more you insure, the more it raises your premium.

Replacement cost coverage is a coverage that replaces the items insured but comes with a higher cost of about 10 percent more than actual value coverage, which takes depreciation of the items into consideration and costs less. But you will get less if you need to replace any items in your inventory.

Dwelling coverage helps repair or rebuild your home or any attached structures when damaged. It is advised that homeowners get insurance that has their dwelling coverage equal to replacement cost.

The rebuilding/replacement cost would include construction cost based on the square footage of the structure. Multiply the total square footage of your home by local per square foot building costs to determine the amount of insurance you’ll need. So, your insurance cost will largely be based on how big your home is.

Every house has certain amenities and a specific type of structure, so the cost of replacing a home varies greatly. Below are some details to take into consideration that can impact the home rebuilding costs:

  • The type of exterior wall construction—frame, masonry (brick or stone) or veneer
  • The style of the house, for example, ranch or colonial
  • The number of bathrooms and other rooms
  • The type of roof and materials used
  • Other structures on the premises such as garages, sheds
  • Special features such as fireplaces, exterior trim or arched windows
  • Whether the house—or a part of it—was custom built
  • Improvements you've made that have added value to your home, such as the addition of second bathroom, or a kitchen renovation

The reason that you need to consider these changes is because the more you add to your house the more losses you have to cover based on the value of the home increasing.

Another very important consideration is that building codes change frequently and may have changed since your home was built. In the case of a disaster, your home has to be rebuilt according to the new building codes. Often, homeowners insurance will not pay for that extra expense.

If you believe that your home is not up-to-date with building codes, it is advised that you buy an insurance endorsement called an Ordinance or Law, which pays the amount toward bringing a house up to code during repair.

When shopping for home insurance it is advised that you look for coverage that has limits that are enough to cover the cost of rebuilding your home. It is also important to consider inflation which can impact the cost of rebuilding a home. One suggestion is to add an inflation guard clause to your policy. WIth inflation guard, you will automatically adjust the dwelling limit to reflect the cost when you renew your insurance.

When a major natural disaster strikes, the demand for building material rises which leads to an increase in price and rebuilding costs. Sometimes inflation can lead to higher cost of rebuilding your home than your insurance policy covers. With inflation guard, you’re ensured that the house will be repaired within limits. Another way to ensure coverage is to buy an extended replacement cost policy, which pays an extra 20 percent if needed.

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