How much homeowners insurance do you really need? Here’s the answer: Whatever it would take to completely replace your home and everything in it.
Every year, devastating fires, hurricanes, and tornados are a sobering reminder that any of us could lose it all in just moments. And in fact, more than 90 percent of Americans live in places where the risk of a natural disaster is moderate to high. Individual tragedies like house fires can destroy your house just as easily. Yet more than two-thirds of homeowners are underinsured, according to the nonprofit United Policyholders.
Of course it’s smart to save money on your homeowners insurance. But not at the cost of being underinsured. Here are some tips and food for thought on boosting your coverage — and your peace of mind.
First, understand your policy
Make sure you understand and are comfortable with how your policy handles a total loss. Policies vary, and so do the state laws that regulate them.
Consider “comprehensive” insurance
The most commonly purchased homeowners insurance is known as “HO-3, special.” But it’s smart to upgrade to “HO-5, comprehensive.” It gives you the most protection, covering almost everything except floods and unthinkables like war, and it’s not necessarily that much more expensive. Companies that don’t carry it sometimes offer add-ons that amount to the same thing.
Do you need flood insurance?
In case you missed it, homeowners insurance does not cover flooding! That’s a whole separate policy. Keep in mind that flood risk can change over time, and storm surge and heavy rains can be a danger outside of official flood zones. Case in point: 2011’s Hurricane Irene hit dumped so much water on landlocked Vermont that some areas were still recovering years later. Learn more at FEMA.
Get acquainted with riders
“Riders,” also called “endorsements,” can be attached to your policy at an extra cost to insure things that often aren’t relevant to the average household, and therefore aren’t covered by the basic premium. On the natural disaster front, that includes things like earthquakes and sinkholes, but it’s also needed for unique or expensive items like diamond rings and artwork.
Insure for your true replacement cost
Replacement cost is not the same thing as market value. Replacement cost can be a lot higher. Even if property values go down, the cost to rebuild probably won’t.
Get an accurate figure. Insurance companies calculate replacement cost with standard industry software, such as HMFacts. You can use it yourself for a small fee — with your first-hand knowledge of your home, you might come up with a different number. To get the most accurate figure of all, hire a local contractor to determine the cost to rebuild.
Consider extended replacement value. This additional coverage insures your home for a specific value plus another 20 to 30 percent or more as a cushion. That could come in handy after a widespread disaster: insurance dollars don’t go as far because the intense demand for materials and labor pushes up costs.
Don’t forget building code upgrades. This add-on coverage pays for improvements that might be needed to meet the latest building codes for electrical systems, insulation, and more. Especially smart for older homes.
Ask about inflation guard. This feature automatically increases your coverage to match rising property values and/or building costs. A good idea in hot markets.
Review your replacement costs every year. When your policy comes up for renewal, stop and think about whether your replacement costs have gone up. Have you made any improvements to your home? Is the market rising? Are labor costs rising?
Heads-up: replace means rebuild. With most policies, you get paid only if you rebuild, and in the same spot. Otherwise, you might get nothing — while still owing your lender the balance on the mortgage. Some policies pay only the actual cash value in these situations, which is usually far less than the cost to rebuild.
Don’t forget your stuff
Most of us don’t realize just how much we’ve spent over the years on furniture, small appliances, clothes, and everything else that fills the typical home. You want to be covered for all of it, and your insurance company will want documentation.
That’s where a home inventory comes in. Find a home inventory app, or just take pictures of everything you own, document value with receipts when you can, and back it all up in the cloud. Stopgap: grab your phone, make a quick video of your belongings, and back it up.