Home insurance can protect your finances from costly and unexpected damage, but how much should you buy? should I buy additional types of coverage too? How do you know if you’ll be protected if you have to file a claim? the bankrate insurance editorial team is here to help answer these questions. We break down the ins and outs of home insurance so you can feel more empowered to make smart financial decisions with your own policy.
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how to determine how much homeowners insurance you need
Determining the right amount of coverage for your home insurance policy can be overwhelming. Rest assured, choosing home insurance coverage amounts may be easier than you think. however, keep in mind that the types and levels of coverage each homeowner needs will vary significantly based on their particular situation.
Home insurance companies typically have a tool that will estimate the cost of rebuilding your home based on details like the location and size of your home, interior finishes, and any custom features. Once your home amount is determined, the amount of coverage you’ll need for the structure of your home, that number will serve as the basis for the levels of various other types of coverage.
For example, your personal property coverage is usually set automatically, typically between 50 and 70 percent of the amount on your home. The same goes for other structures coverage and loss of use coverage, for which coverage percentages are generally set automatically based on the amount of home coverage you need. You can usually adjust the policy if you need more coverage, but the automatic levels serve as a starting point.
assess your home
The first step in choosing the amount of homeowners insurance you need is often to complete a full appraisal of your home. Insurance companies have their own metrics to assess your home’s value and potential risk, but as a homeowner, it’s generally a good idea to get an overview of your home and what it needs to cover before looking for quotes.
Some standard factors to consider include the size, age and features of your home, as well as the age of your roof. You may also want to do a full assessment of your valuables and who uses your home, factors we’ll look at in more detail below.
know the difference between actual value and replacement cost
Home insurance policies have a few different ways to compensate you for damages: actual cash value and replacement cost value. you may have the option to choose between these settlement types, or you may be automatically given one or the other. however, it is important to understand them as it can help you set realistic expectations in the event you need to file a claim.
Actual cash value, also called ACV, means that depreciation will be deducted from the settlement of a claim. For example, if you have personal property ACV coverage and your 15-year-old TV is damaged in a covered loss, your homeowner’s insurer will pay you the actual value of your TV instead of what it would cost to buy a new one .
For stronger coverage, you may be able to choose replacement cost. This type of deal would pay you for the cost of replacing your TV, even though a new TV will likely cost more than your 15-year-old TV is worth. Both ACV and replacement cost can be applied to the structure of your home, your personal property, or both. If you’re not sure what coverage is best for you or what settlement option is included in your existing policy, it may help to talk to your agent.
Insurance companies set sublimits for certain types of personal property. for example, a policy with $100,000 in personal property coverage can only pay a maximum of $2,000 for lost jewelry. If you have expensive personal belongings, you may want to consider adding valuables coverage or scheduled personal property coverage.
research local construction costs
You buy homeowners insurance to prepare for damage or loss, so you need to know how much it will cost to repair or replace your home. Find out how much building materials and labor will cost to restore your home to its current condition or build an equivalent new home. Factors that affect how much coverage your home needs include the number of bathrooms it has, the materials used in its construction, and its special features. For example, if your living room has custom imported tiles, you may need higher coverage levels to protect it. Understanding these factors may help you decide if a company’s estimate of your home’s replacement value is too high or too low.
One aspect of construction costs to consider is whether your home meets current building codes. Generally, houses that are not up to code cost more to rebuild. If your home doesn’t meet current building codes, you may want to consider adding an ordinance or legal endorsement to your home insurance policy. after a covered loss, ordinance or law coverage can help pay for the additional costs of bringing your home up to code.
consider how you use your home
How you use your home can help you determine how much personal liability, medical payments, and general insurance you may need. For example, if you often host parties and gatherings for friends and family, you may want to consider a higher liability limit and possibly even an umbrella policy to protect you in the event someone is injured as a result of your negligence. If you have a swing set or pool (especially those with a diving board), you may want to increase your medical payments coverage, which pays guests’ medical costs up to your policy limit, regardless of fault.
search for rental rates in your area
If your home sustains major damage, you could spend weeks or months living in temporary housing while it is repaired. so it may be a good idea to find out how much it will cost you and your family to rent a house or apartment in your area, or to live in a local hotel. Homeowners living in expensive real estate markets like San Francisco or New York City may need more additional living expense coverage, also called loss of use coverage, than is included in a standard policy.
take inventory of your personal belongings
If you need to file a claim for damage to your personal property, a home inventory can be a helpful tool. this includes:
- item name and description
- purchase cost or actual cash value
- date and place of purchase and receipts, if available
- photos of each item
- estimated replacement cost
- Flood Insurance: Standard homeowners policies do not include flood coverage. Typically, you’ll need to purchase a separate flood insurance policy for this coverage. Flood insurance is offered through the National Flood Insurance Program, administered by the Federal Emergency Management Agency, as well as some private insurers.
- Earthquake Insurance: Most homeowners insurance policies do not cover earthquake damage, even in high-risk areas. however, many homeowners insurers offer separate policies or homeowners insurance endorsements for earthquake damage. In California, this coverage is offered through the California Earthquake Authority.
- Sinkhole coverage: Sinkholes occur in many regions of the us. uu. but they are not covered by a standard homeowners policy. Sinkholes can cause extensive damage to homes, so it’s important to have sinkhole coverage if your area is prone to this hazard.
- Mine Sinking Insurance: In some areas of the country, sinkhole-like damage can be caused when abandoned mines collapse. this is called mine collapse, and you’ll need an endorsement on your homeowners insurance policy for related damage to be covered.
- Comprehensive insurance: Umbrella policies can help pay liability claims after your personal liability insurance reaches its limit. For example, if a court awards an injured person $500,000 after sustaining an injury on their property and the liability limit on their home is only $300,000, their umbrella policy could pay the difference up to the umbrella policy limit.
- Sewer Overflow Coverage: Although sewer overflow coverage is not part of a standard home insurance policy, it can usually be purchased as an add-on. Preventive checks to protect your home from clogged pipes can also be helpful.
- Priceless Jewelry and Antiques Coverage: While coverage for valuables such as jewelry and art is typically included in a standard homeowners policy, there are typically limits on how much to what an insurance company will pay for these items in the event of a covered peril. Homeowners with extensive collections of valuables may want to purchase additional coverage to ensure their items are financially protected.
- Aggressive Dog Breed Insurance: Home insurance policies often exclude liability coverage for injuries caused by certain breeds of dogs, such as Pit Bulls, German Shepherds, or Rottweilers. if you have a dog, let your insurance company know. If they exclude coverage for your dog’s breed, it may be wise to seek out a home insurer that offers coverage.
Having a digital home inventory can also help make the claim process easier. The list should have everything you consider valuable, including electronics, cash, jewelry, and furniture. Consider using online cloud storage for your inventory or store it elsewhere, like your office or a family member’s home. That way, if your home is damaged, the list won’t be damaged either. You can also ask your home insurer to recommend inventory apps to make the process easier.
Determining the value and replacement cost of your belongings takes time and requires careful thought. You can replace items like modern sofas and coffee tables with relative ease, but possessions like fine art and family heirlooms are often irreplaceable.
Homeowners insurance policies typically place limits on the amount of coverage included for individual items, such as electronics and artwork. If you own many valuable items, you might consider increasing your policy limits or purchasing additional coverage for specific possessions in the form of an endorsement or float.
consider your personal finances
Personal finances are often a key factor in determining how much you can afford to pay out of pocket to rebuild your home or replace your personal belongings. Keep in mind that while most homeowners insurance policies include a provision that automatically increases your coverage limits each year to keep up with inflation, if inflation rises rapidly, your current limits may may not be enough to adequately cover you and you may need to adjust your policy.
Most insurance experts agree that it’s best to have enough coverage to rebuild your home and replace personal items. however, some homeowners have ample savings and may prefer to cover more out-of-pocket costs in the event of damage to their home or property in exchange for lower rates on their insurance.
Usually, you can lower your home insurance rate by increasing your deductible. But keep in mind that if disaster strikes, you’ll have to pay more out of your own funds. it all comes down to risk. If you don’t have enough homeowners coverage, a major loss from a fire, storm, or other event could seriously affect your finances.
what is not covered in a standard homeowners insurance policy?
As a homeowner, various mishaps could affect your home. While home insurance can protect your finances against a variety of situations, a standard policy doesn’t cover everything. In fact, there are several common home insurance exclusions. For damage not covered by a standard policy, you may want to consider purchasing additional coverage, including: