Is Your Insurance Working For You?
When was the last time you looked at your insurance coverage? Ideally, the answer to that question is sometimes in the last year. Many of us experienced personal or weather-related disasters in 2020 and early 2021 — and when disaster strikes, we want to make sure we’ve taken every measure to proactively protect ourselves. To accomplish that, we need to review our insurance policies — home, health and auto — annually to ensure they still work for us.
There are three quick steps that should go into your annual insurance reviews:
- Pull up the insurance you currently have. Identify the premium, deductible, and total coverage of your plan.
- Confirm that you can still cover the deductible, and be sure that the total coverage meets your needs. This is an especially important step if anything about your personal, professional or home situation has changed over the course of the year.
- Set a meeting to consult with your insurance agent if you need to make any changes to your coverage or terms. You may also decide to shop around for better options.
Both major and minor life events can change the level of coverage you need. To help your insurance reviews this year, ask yourself the below questions:
- Has the value of your house or its contents changed in a significant way? Making home improvements, seeing an increase in your home’s appraised value, or acquiring items of significant value should be reflected in your policy.
- Have you added a driver (especially a teenager) or removed a driver from your auto insurance policy? Coverage should also reflect a change of vehicle or even change of address.
- Have you added dependents to your household or has the health of a family member changed? A change to insurance can be triggered by job loss, marriage, or divorce. In addition to health and life insurance, you may want to consider a long-term care policy.
As you review each insurance policy, look carefully at your deductibles. If your salary or savings have increased, you may be able to increase your deductibles to reduce your premiums. Also, when looking for ways to save, ask for quotes from several insurers. Make sure the quotes are based on the same amounts and terms.
Let’s look specifically at homeowners insurance.
While it doesn’t guarantee your home’s safety or full recovery from an event, home insurance does mean that costs associated with a disaster should not financially ruin you. It’s also not optional: mortgage lenders require a home insurance policy before a home sale is finalized. Depending on the nature of your loan and the size of your down payment, your monthly premium may be bundled with your mortgage payments (your escrow account).
Let’s look specifically at homeowners insurance.
Typical homeowners insurance policies offer coverage for the main structure, additional detached structures, personal property, liability (injury to guests), and additional living expenses incurred in the event of damage to your property. The value of your home and possessions — and your budget — will dictate how much coverage you get in each part of the policy. Standard policies do not cover damage by floods, earthquakes, poor property maintenance, or a number of other perils. If you live in a flood or other hazard zone or are considering purchasing property that could be affected by certain natural disasters, you should investigate your insurance options.
|
Coverage type |
What it does |
Typical amount |
|
Dwelling |
Covers damage to the home and attached structures, such as a porch. | Enough to rebuild your home |
|
Other structures |
Covers stand-alone structures on your property, such as a fence or shed. | 10% of dwelling coverage |
|
Personal property |
Pays to repair or replace belongings that are stolen or damaged in a covered event. | 50% to 70% of dwelling coverage |
|
Additional living expenses |
Helps pay temporary living expenses while your home is being repaired. | 20% of dwelling coverage |
|
Liability |
Pays if you injure someone or cause property damage unintentionally or through neglect. | $100,000 to $500,000 |
|
Medical payments |
Pays to treat someone injured on your property, regardless of who’s at fault. Also pays if you, a family member or a pet injures someone elsewhere. | $1,000 to $5,000 |
How much homeowners insurance do you need?
COVERING YOUR HOME
You need enough homeowners insurance to cover the cost of rebuilding your home if it’s destroyed. To estimate your rebuilding cost, multiply the square footage of your home by local construction costs per square foot. Your home insurance agent or insurer should be able to help you calculate the replacement cost.
Don’t focus on what you paid for the house, how much you owe on your mortgage, your property tax assessment or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.
COVERING YOUR STUFF
For “personal property,” your belongings, you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way. However, you can lower this limit if needed or purchase extra coverage if you think the limit isn’t enough to cover your things.
A thorough home inventory is the best way to pinpoint how much it would take to replace all your stuff. An inventory record can also come in handy later if you have to make a claim and need to know exactly what you lost. You could make a list or, as a quick inventory hack, take a video of your home and all your items using your smartphone.
Replacement cost vs. actual cash value
If your home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose — and much of it will be paid directly to contractors rebuilding your home, in many cases.
One key decision is whether to choose coverage that will pay whatever it takes to rebuild your home, even if that cost exceeds your policy limits. This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level. Here’s a rundown of several options you may encounter.
Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings. For items that are several years old, this means you’ll probably get only a fraction of what it would cost to buy new ones.
Functional replacement cost value coverage pays to fix your home with materials that are similar but possibly cheaper. For example, damaged plaster walls could be replaced with less expensive drywall.
Replacement cost value coverage pays to repair your home with materials of “like kind and quality,” so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.
Some policies offer replacement cost value coverage for your personal items. This means the insurer would pay to replace your old belongings with new ones, with no deduction for depreciation. If this feature is important to you, make sure to check the policy details before you buy — this is a common option, but you typically need to pay up for it.
Extended replacement cost value coverage will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home. The limit can be a dollar amount or a percentage, such as 25% above your dwelling coverage amount. This gives you a cushion if rebuilding is more expensive than you expected.
Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits. Not all insurance companies offer this level of coverage.
Key takeaways:
- Homeowners insurance provides financial relief if a covered event damages your home, property or personal belongings.
- It can also pay out when you’re held responsible for an accident or injury.
- In some cases you can get additional policies for events not covered by your regular home insurance, such as flooding.
Your home is more than just a roof over your head. It may be your most valuable asset — and one you likely can’t afford to replace out-of-pocket if disaster strikes. That’s why protecting your investment with the right homeowners insurance coverage is so important.
Hope this helps and remember when it comes to all your real estate needs and questions, we’re only a phone call away.
Sources:
Doug Sibor is an insurance writer at NerdWallet
