Homeowners Insurance: How Much do I Need for My Home?
When a major event happens, you never want to find out that you are underinsured. You also don't want to be paying more than you have to every month. It's difficult to find a balance between adequate coverage and excessive coverage, especially when insurance policies are difficult to read and understand for the average consumer. How do you know how much insurance coverage you actually need for your home?
Essentially, you want enough money to rebuild your home in the case it is completely destroyed (dwelling coverage), enough to replace your personal property, cover injuries and damages that may happen at your house, and reimburse your living expenses if your home is unlivable and you need to stay in a hotel. Let's start by determining how much dwelling coverage you need.
DWELLING COVERAGE
The first step in the process of determining how much dwelling coverage you need is calculating the entire replacement cost of your home. Remember, you aren't calculating the market value of your home. Instead, you want to determine how much it will cost to rebuild the home from the ground up.
You want to find the square footage of your home and determine the cost to rebuild it using the same building materials. You can ask a local construction company for estimates. It is a good idea to get multiple estimates for rebuilding and take an average of those estimates. You will want to take into account the amount of rooms you have, the types of building materials that were used to build your home, the cost of any rooms that were remodeled, and any special features such as unique trim or custom windows.
If you added any additional structures to the home, such as an attached garage or second floor, add those to your dwelling coverage. You also need to keep in mind that your new home will need to be built up to meet the most current and up to date building codes.
Once you have a solid idea of how much it will cost to rebuild your home, you'll know how much dwelling coverage you need. What you need to remember is that you're paying to rebuild, not for market value. If the market value of your home is $500,000 but it only costs $250,000 to rebuild it, you would be overpaying if you purchased $500,000 in dwelling coverage.
PERSONAL PROPERTY COVERAGE
You need to have enough money to replace items you lost. Personal property includes furniture, clothes, jewelry, appliances, electronics, even your family board games. If you own $100,000 worth of items but only have $30,000 in property coverage, you won't be able to replace everything you lost. A lot of people dramatically underestimate the cost of what they own, so more often people are underinsured for their property than they are over insured. The last thing you want is to find out you can't replace everything you own when it is destroyed or stolen.
Start by making an inventory of everything you own. Move from room to room and take note of all of your belongings. In your bedroom, for example, you might start by listing your bedroom furniture, clothes, jewelry, shoes, and even the electronics you store there. Make note of all of your electronics such as phones, laptops, tablets, smart watches, and other devices.
Once you have a list for all of the items you own, take photos of them for proof. If you are making a claim to cover your 70" flat screen television, you want to make sure you can prove you owned it to begin with just in case there are issues with the insurance company down the line.
If you have items that are very expensive, you may want to consider adding additional coverage for these items. Personal property coverage has limitations, so don't expect the standard coverage to reimburse you for a $30,000 piece of rare artwork. Keep your most expensive items on a secondary list and talk to your insurance agent about supplemental insurance or endorsement for these items.
When you know how much your items are worth, you can be more confident that you are paying for a policy that covers you appropriately in case these items are lost or destroyed.
PERSONAL LIABILITY COVERAGE
After your home and your belongings are properly insured, the next thing on the list is to make sure you have an adequate amount of personal liability. Personal liability is the part of your insurance that covers others that may be hurt while on your property. If someone slips and falls in your kitchen, is bitten by the family dog, or slips off your upstairs balcony and breaks a leg, you don't want to be strapped with a large medical or legal responsibility. There's also property damage to consider. For example, if a tree that is on your property falls on your neighbor's house or car, you'll be strapped with the financial responsibility of replacing it or paying to fix the damages.
Basic homeowners insurance policies have a minimum of about $100,000 in liability. This is not typically enough to protect you from financial obligations in case of an accident. There isn't a huge cost difference in policy and premiums when you purchase extra liability coverage. For example, the difference between $500,000 worth of liability coverage and $1,000,000 in coverage is only an increase of $10 per month with State Farm. You should ask your agent for the cost of adding extra liability coverage to your policy.
While it is important to make sure you are not overpaying for insurance, the last thing you want is to realize you have not purchased enough when the time comes. Follow these tips to ensure you have adequate coverage, and you'll be glad you did.