How Much Should Your Home Be Insured For?


Everyone hopes that the worst case scenario will never happen, but everyone should prepare as if it will.  Many homeowners, nearly two-thirds according to the consumer advocacy group United Policyholders, are under-insured and unaware.  There are some costs that often go overlooked when shopping around for homeowner’s insurance such as the costs incurred to live elsewhere while your home is being rebuilt, or protection of your financial assets in the event of liability to others.

It’s important to take the time to read and review your policy in detail to ensure you fully understand what is, and what is not, going to be covered in the event of a disaster.  Many consumers buy a policy with only enough to cover the amount of their mortgage but often this won’t actually cover the cost to rebuild the home, especially if a sizeable amount was put down on the home initially.  In many cases even the full purchase price of the home does not cover what it would cost to rebuild it.  Older homes may have a current market value far less than the cost of building that same home brand new.

What should you do?  The first step is to figure out what it would cost to rebuild your home.  The best way to do that is by asking a professional home-replacement cost estimator or a local builders association.  By working with someone local in your area you can get numbers based on the actual costs of labor and materials where you are located.  This value is the number you should take back to your insurance agent when looking for coverage.

You’ll also want to make sure your belongings are insured adequately.  One good tool for that is from the Insurance Information Institute.  This easy-to-use online tool helps homeowners calculate the cost to replace their belongings.

While you have your insurance agent on the phone here are some other coverage areas that are commonly missed by consumers:

  • Mold or Sewage Backup – most homeowners assume they’re covered for these types of disasters, but that’s not always the case. Some plans exclude these items, or have claim limits, so it’s important to clarify.
  • Flood Coverage – this is another area that is generally excluded from coverage. If you feel you could be at risk of flooding, it’s up to you to ask about adding this coverage.
  • Deductible Amount – the deductible listed ($500, $1000, etc) may have some loopholes in the fine print. Some plans have adjustments for named storms such as hurricanes or winter weather.  In these cases, the homeowner would be required to pay 10-15% of the insurance coverage as the deductible.  For a $300,000 plan that could be $30-45,000.

As a homeowner the last thing you need after a major disaster is to find out you don’t have the coverage needed to rebuild your home and replace your belongings.  A little bit of legwork could save you from a major problem later.

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