How much homeowners insurance do I need? | III
determine how much insurance you need for the structure of your home
Standard homeowners policies provide coverage for disasters such as fire, lightning, hail, and explosion damage. those who live in areas where there is a risk of flooding or earthquakes will also need coverage for those disasters. In all cases, you’ll want your policy limits to be high enough to cover the cost of rebuilding your home.
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The price you paid for your home, or the current market price, may be more or less than the cost to rebuild. And if your insurance policy limit is based on your mortgage (as some banks require), it may not adequately cover the cost of rebuilding.
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While your insurer will provide a recommended coverage limit for the structure of your home, it’s also a good idea to educate yourself. To make sure your home has the right amount of structural coverage, consider:
major factors that will affect home reconstruction costs
- local construction costs
- the square footage of the structure
To get a quick estimate of how much insurance you need, multiply the total square footage of your home by your local construction costs per square foot. (Note that terrain is not taken into account in reconstruction estimates.) To find out construction costs in your community, call your local real estate agent, builders association, or insurance agent.
details that can affect home reconstruction costs
- the type of exterior wall construction: frame, masonry (brick or stone), or veneer
- the style of the house, for example ranch or colonial
- the number of bathrooms and other rooms
- the type of roof and materials used
- other structures in the facility such as garages, sheds
- special features such as fireplaces , exterior trim, or arched windows
- if the home, or a portion of it, was custom built
- improvements you’ve made that add value to your home, such as second bathroom addition, or a kitchen renovation
whether or not your home is code compliant
Building codes are updated periodically and may have changed significantly since your home was built. In the event of damage, you may need to rebuild your home to the new codes, and homeowners insurance policies (even a guaranteed replacement cost policy—see below) typically won’t cover that extra expense. If you suspect that items in your home don’t meet current building codes, consider getting an endorsement for your policy called an ordinance or law, which pays a specific amount to bring the home up to code during a covered repair.
if your home is old with difficult-to-replace features
beautiful special features of older homes, like moldings and carvings on the walls and ceiling, are expensive to recreate and some insurance companies may not offer replacement policies for that reason.
If you own an older home, you may need to purchase a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, such as drywall, with similar materials, the policy will pay for repairs using today’s standard building materials and construction techniques.
allowing for a possible increase in the cost of construction materials
Inflation can affect reconstruction costs. If you plan to own your home for a while, consider adding an inflation protection clause to your policy. An inflation protector automatically adjusts the dwelling limit to reflect current construction costs in your area when you renew your insurance.
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After a major catastrophe, such as a hurricane or tornado, construction costs can suddenly increase because the price of building materials and construction workers increase due to widespread demand. this price increase can push rebuilding costs over your homeowners policy limits and put you short. To protect against this possibility, a guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the disaster. Similarly, an extended replacement cost policy will pay an additional 20 percent above the limits (possibly more, depending on the insurance company).
determine how much insurance you need for your possessions
Most homeowners insurance policies provide coverage for your belongings at about 50 to 70 percent of your home insurance. however, that standard amount may or may not be enough. to know if you have enough coverage:
conduct a home inventory of your personal belongings
To accurately assess the value of what you own, taking a home inventory is highly recommended. An itemized list of your belongings will not only help you determine how much insurance you need, it will also serve as a convenient record. In the event that some or all of your things are stolen or damaged in a disaster, an inventory will make filing a claim much easier.
There are several apps available to help you take a home inventory, and our article on how to create a home inventory can also help you.
As you review your possessions, consider whether you want to insure them for actual cash value (where the policy would pay less for older items than it paid for new ones) or for replacement cost (which would cover up to replacing old items). items). Replacement cost coverage for homeowners costs about 10 percent more, but it’s generally a worthwhile investment in the long run. (Note that flood insurance for belongings is only available based on actual cash value.)
If you think you need more coverage, contact your insurance professional and ask about higher limits on your personal belongings.
take stock of your expensive items
There are limits on the coverage of a standard homeowners insurance policy for items such as jewelry, silverware, collectibles and furs. for example, jewelry coverage may be limited to less than $2,000. Some insurance companies may also put a limit on what they will pay for computers.
Check your policy (or ask your insurance professional) for your coverage limits for expensive items. If your home inventory includes items for which the limits are too low, consider purchasing an endorsement or special personal property float. this will allow you to insure valuables individually or as a collection, with significantly higher coverage limits.
determine how much additional living expense insurance you need
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Additional Living Expenses (ALE) are a very important feature of a standard homeowners insurance policy. If you are unable to live in your home due to a fire, severe storm or other insured disaster, ALE pays the additional costs of temporarily living elsewhere. covers hotel bills, restaurant meals, and other living expenses incurred while your home is being rebuilt.
If you rent part of your home, this coverage also reimburses you for the rent you would have charged your tenant if your home had not been destroyed.
many policies provide coverage for about 20 percent of your home insurance. but beer coverage limits vary from company to company. For example, there are policies that provide an unlimited amount of coverage, for a limited time, while others may only set limits on the amount of coverage. in most cases, you can increase the beer cover for an additional premium.
determine how much liability insurance you need
The liability portion of homeowners insurance covers you against claims for bodily injury or property damage caused to others by you, family members, or pets, as well as incurred court costs and expenses. damage awarded.
You must have sufficient liability insurance to protect your assets. Most homeowners insurance policies offer a minimum of $100,000 of liability insurance, but higher amounts are available, and it is increasingly recommended that homeowners consider purchasing liability coverage of at least $300,000 to $500,000.
If you own property or have investments and savings that exceed your policy’s liability limits, consider purchasing a separate additional coverage or additional liability policy.
consider an umbrella or excess liability policy
General or excess liability policies provide coverage above the standard limits of your home (or auto) liability policy. These policies start paying after you’ve exhausted the liability insurance on your underlying policy. In addition to providing additional dollar coverage, excess or general liability often offers broader coverage than standard policies.
The cost of an umbrella policy depends on the amount of underlying insurance you have and the type of risk it represents. The more underlying liability coverage you have, the cheaper the umbrella or excess policy will be. To underwrite an umbrella or excess policy, most companies will require a minimum of $300,000 of underlying liability insurance in your standard homeowners policy.
next steps: learn how to create a home inventory.