You buy homeowner's insurance to protect your biggest asset, so it’s important to purchase enough coverage to suit your needs. By looking at a few key factors, you could end up saving yourself a lot of money and heartache should you ever have to make a major homeowner's insurance claim. Be smart and ask yourself the following four questions when considering how much coverage to purchase.
How much will it cost to rebuild?
When you’re figuring out the cost to rebuild your home, use current construction prices. Don’t add in the cost of the land, and don’t base your cost estimates on how much you originally paid for the house.
Even though your mortgage lender may require you to have homeowner's insurance, you still may not be adequately protected. In most cases, the policy limit is the amount owed on your mortgage, which may not be enough to rebuild at current prices. To estimate the amount of insurance you need, multiply the total square footage of your home by the building costs per square foot. You can get information about local building costs by calling your real estate agent or home builders association.
You should select an extended replacement cost policy for several reasons:
- It pays for your home to be repaired with materials that are similar in kind and quality to what was originally used.
- There is no deduction for depreciation or wear and tear.
- If the demand for materials and construction workers exceeds the supply because of a widespread disaster, and prices skyrocket, an extended replacement cost policy will pay whatever is necessary to restore your home to its original condition.
How much will it cost to replace my personal possessions?
Most homeowner's insurance policies cover your personal possessions for 50 to 70 percent of the total coverage amount on your home. Conducting a home inventory will help you determine if this is enough. Create a detailed list of everything you own and how much it will cost to replace these items should they be stolen or destroyed. If you feel you are underinsured, ask you agent about increasing the coverage limits for your possessions.
Will I have any additional living expenses as a result of an insured disaster that damages my home?
When a disaster strikes, you may be forced to live somewhere else while your home is being repaired. Standard homeowner's policies covers hotel bills, restaurant meals and other living expenses incurred while you are living away from home. In addition, if you rent out the property that was damaged, this coverage will reimburse you for any rent you would have received from tenants while the home is being repaired.
Additional living expenses coverage varies among companies. The standard is 20 percent of the total amount of coverage on your house. There are also policies that cover unlimited additional living expenses for a specific period of time.
Ask your insurance agent to tell you how much coverage you have and how long the coverage stays in effect. If you don’t feel you have sufficient coverage for additional living expenses, consider increasing it.
How much coverage do I have in the event I am named in a lawsuit for bodily injury or property damage caused to others?
The standard homeowner's policy covers you, your family members, and your pets in the event of injury caused to others. The coverage extends to both the cost of defending the case in court and any damages you are required to pay. The majority of homeowner's insurance policies provide $100,000 worth of liability insurance; however, you can get higher amounts. Conventional wisdom says that homeowners should carry at least $300,000 to $500,000 worth of liability protection.