Homeowners insurance sounds like it should be simple. Unfortunately, that isn’t always the case. A lot of that comes from common misunderstandings, but the truth is that homeowners insurance is so much more than just something that pays you when you house burns down. Once you have the right home insurance deductible amount figured out, you need to figure out how much of your house’s value needs insured.
Home Replacement Value
Many people mistakenly assume that the amount of homeowners insurance they need is equivalent to the market value of their home plus the value of the contents. This is a good thought but not how it actually works.
In most cases, no matter what happens to your home, whether it’s a fire, a falling airplane, or an errant bulldozer, the land beneath your house is seldom destroyed along with the home. That means that there is no point in insuring the value of the land your home sits on. Additionally, the foundation of the home survives most events intact. This can actually make your home insurance cost more or less than a similar value house located elsewhere. In popular locations where land values are high, a $500,000 home may be insured for just $250,000, while in an area where land values are lower, a $500,000 home may need to be insured for $350,000 or more.
It is important to note that most homeowners insurance policies do NOT cover any sort of flood damage. Flood insurance must be purchased separately from regular home insurance policies.
Insurance companies use data and complex algorithms to make an estimate for how much your home should be insured for. It is important that the amount your home is insured for is accurate. If your homeowners insurance policy value is not within a certain percentage of the cost of replacing your home, then you will underinsured. Your insurance company will not pay $500,000 to rebuild your home if it is only insured for $300,000.
Typically, the insurance companies are good at adjusting the amount of insurance required based upon inflation and changing market conditions. However, where the insurance companies will not be accurate is when you make changes to your home. A 2,500 square foot home with an unfinished basement costs a much different amount to rebuild than a 2,500 square foot home with a 1,000 square foot finished basement. Be sure to notify your insurance company about additions, improvements, or other changes you make to your home in order to have the right amount of coverage.
Homeowners Insurance Household Contents
Homeowners insurance policies come with various default coverage limits. A policy may cover up to $1,000 in jewelry, for example. If you need more coverage than that, you’ll need to purchase an additional rider.
Homeowners Insurance Liability
Most homeowners insurance policies also come with liability coverage for the property owners. The specific amounts are limited by the policy. For the most part, this liability insurance covers people who get injured on your property somehow, from tripping on a loose step, to falling on a sidewalk, to having a tree branch fall on their head. The liability insurance in a homeowners policy does not include operating a business in your home. Although a home-office may not count as requiring extra coverage, especially if you do not have people come to your office for business.
If you have a lot of equity in your house, or if you have significant non-retirement assets elsewhere, you may benefit from an umbrella insurance policy which offers more liability coverage. Umbrella policies are written such that you have to keep a certain amount of liability coverage under both your car insurance and your house insurance, and it only pays out after those policies have paid in full. Despite the way it may seem, actually being sued and held liable for something other than a car accident (which is covered under your auto insurance) isn’t all that common, thus, umbrella insurance policies for a $1 million aren’t very expensive.