Before you go to the bank to take out a mortgage for that beautiful home you just said yes to, you will be required to sign up for homeowners insurance coverage to protect your investment. A common mistake many homeowners make is taking out a policy that reflects the amount of their loan. We’re here today to share why this strategy may be wrong for you—and possibly very risky.
Your insurance is meant to cover your home if something—such as a fire, hail, or a tornado—damages or destroys it. Here’s an example of a worst-case scenario:
Imagine that a fire burns your home to the ground and damages everything that was in it. It’s imperative that your insurance has your back and provides you with the resources needed to rebuild, as well as replace all that you lost. Unless you have a beachfront property—in which case your home’s market value may be higher than the cost to rebuild a replica—you will most likely need coverage that exceeds your home’s value.
Roughly 60 percent of homes in the U.S. don’t clearly understand this concept and are underinsured. We want to help you ensure you’re not among them.
What should my homeowners insurance policy cover?
In short, your policy should include four types of coverage:
- Dwelling (required)
- Personal property (required)
- Additional living expenses (recommended)
- Liability (required)
We’ll break down each of these types of coverage to explain what they are and what they protect. Then, you can be more confident in the policy you already have or update it if necessary.
1. Dwelling Coverage
Dwelling coverage will cover your home if it’s destroyed and needs to be rebuilt. This coverage should equal the amount of money it would take to build your home from the ground up—also known as its replacement cost.
To calculate the replacement cost of your home, take your home’s square footage and multiply it by your local (per square foot) rebuilding costs. Make sure you include your garage and any outbuildings on your property, such as a shed or barn. Check with builders in your area for local building costs (often posted on construction company websites), or ask your independent insurance agent for these numbers.
Once you have your own estimate, you should get a couple more so you can compare them. You can use online replacement cost estimate tools or ask your independent insurance agent to give you an estimate. If two or three of the estimates are similar, you should have a good idea of what your coverage amount should be.
Pro Tip: If you end up remodeling parts of your home or adding onto it, your home’s replacement cost will change; you may need to update your insurance policy when this happens. Other factors that may affect the replacement cost include new building codes in your area and fluctuating building material and construction costs.
2. Personal Property Coverage
If you also want your belongings to be covered in case of a disaster, you’ll need personal property coverage. It will cover items like your furniture, appliances, electronics, clothing, and sporting goods in your home and garage. Many insurance companies provide 50–75% of the dwelling amount for personal property by default, which may not be enough for you. To determine how much personal property coverage you need, take an inventory of all your belongings and how much everything is worth.
Pro Tip: If possible, create a video using your cell phone as you take inventory. Having a digital record on hand at the time of a claim could prove incredibly beneficial.
3. Additional Living Expenses Coverage
If your home is seriously damaged and you end up having to stay in a hotel and eat out for a few weeks or even months, additional living expenses coverage will reimburse you for added costs.
Let’s say, for example, that a tree falls on your roof during a storm and you’re forced to stay in a hotel while it’s being repaired. You will still be responsible for paying your mortgage during this time, but since hotel costs will be extra, they will be covered by your additional living expenses insurance. This coverage should also take care of extra food expenses (anything that exceeds what you would normally spend while living at home).
4. Liability Coverage
Liability covers you if someone is injured on your property at any time. Many policies require a minimum of $100,000 in liability coverage, but we highly recommend you purchase $500,000 if you’re able. If not, we recommend at least $300,000. If you’re forced to pay for someone’s medical bills or someone files a lawsuit against you, you need to be prepared.
Another addition you should consider for your homeowners insurance policy is flood insurance. You can read our previous blog post, “Does Homeowners Insurance Cover Flooding?” to learn more.
If you aren’t sure if the coverage you have is sufficient or know where you should start looking for better coverage, we’d love to help you. We’ll start by shopping multiple top-rated insurance companies on your behalf. Then we can create a customized quote for your home that fits your specific needs and budget.
To get started, you can fill out a quick form on our website to start the process. Also feel free to contact us directly. We’d be more than happy to answer any of your questions over the phone or via email. We look forward to helping you protect one of your most important investments!
– “What You Don’t Know About Homeowners Insurance Could Cost You.” Consumer Reports
– “How Much Homeowners Insurance Do I Need?” Dave Ramsey