How much insurance do you need for your house?

How much insurance do you need for your house?

 

One thing you must definitely do right is choosing enough amount of coverage for your building, in the event that might face a big damage or loss, resulting from catastrophes. Usually, your insurance company will match your premium with the most appropriate level of coverage, but in some cases there can be shortcomings, deriving in essence from poor transparency, and you might end up with insufficient insurance on your property. Thus, it is worth to do your own calculations prior to approaching a new policy.

It is possible that you don’t get proper estimates in the first place, or that you become underinsured by not reviewing and updating your policy, aligning it with eventual changes, like retrofitting or remodeling you have made to house over time. Insurance companies won’t adjust automatically your policy, and it is always better to be aware of your options.

Besides, if your insurance is paid along with mortgage in a escrow, it is more likely that coverage has a limit set lower (to actual cash value), enough just for the mortgage lender to cover its investment, but not for you.

Ideally, you should be finding a well prepared agent who can provide all the necessary explanation, advising the best moves for you, before underwriting anything.

 

How do you know how much coverage to buy?

 

First and foremost, you shouldn’t assume that you will insure your home for its purchase value, nor its actual market value.If your property is worth $200,000, insuring it for the same amount would mean being overinsured or worst, underinsured, because it can be more or less than home replacement cost: this is the value to which you must refer, e.g. how much would be to repair or rebuild the structure, based on materials and labor costs for the size and location of the house. This is truer especially as the building is older: you want the limits of coverage to be such to financially cover the expenses for replacing your home to newer standards, which is costlier. Mind also that land is not taken into account.

You can get a rough estimate of your home replacement cost by using this formula:

Total square footage x (local building costs x square ft) 

You can find local costs by contacting the community you are in, a construction association, or an educated real estate agent. Otherwise, if you have a spare half an hour, you can use online tools like AccuCoverage to have a more precise calculus.

In fact, the outcome depends also on several characteristics of your house: type of construction(brick or stone masonry, veneer or frame), nature of foundation, quality of the roof, number of stories, attached structures like garages and sheds, presence of special components like chimneys, improvements such as a renovation or any that has increased the value of the property.

You may also want to use our calculator: using its internal database, it automatically associates your home purchase value with its home replacement cost: along with ‘dwelling coverage’, you will see other coverages and what your average annual premium could be, as well.

If you don’t feel comfortable with those numbers, the sure way is to reserve a contractor appraisal, then you will put the estimation in front of your insurer.

 

Possible strategies for your policy

 

The most simple and available option to get adequate coverage is extended replacement cost: it puts a percentage extra cap over your limit, for instance, a 20% or 25% that will exceed the standard replacement cost. This is particularly useful when severe weather like hurricanes, tornadoes, or floods cause multiple claims that make rapidly fluctuate the costs of labor and materials, because of increasing demand: without this extra, you are potentially left uncovered.

An even better choice is a policy with guaranteed replacement cost: regardless of the cost, your home will be restored, but this will obviously come with a significantly higher premium.

A similar intervention is adding an inflation guard clause: that means your house will be insured for amounts of coverage that will vary over time, accommodating the shifting construction costs. This is naturally a good move for long-term homeownership, and/or if living in a rapidly changing community.

As hinted, an old house requires special attention. It is more costly to repair or rebuild, likewise is harder to find material to get back its components to the original. For such houses, it can certainly be recommended a surplus coverage: you will want something specific, like a modified replacement cost. Your home will be insured for the replacement cost necessary to rebuild it to meet a new improved standard of safety. For more details, read about the H0-8 policy.

Homes are also subject to building codes: whenever a house is built it must follow rules about the minimum conditions of safety and health for occupants. These don’t stay just the same over time, and your home must be rebuilt or repaired adhering to the newest codes: with standard replacement costs, you might find yourself in a deficit. If your property is outdated in its whole, or in some parts, you may consider adding an Ordinance to your policy, which implies that the replacement process takes into account the costs of compliance to the last codes.

Sources: Insurance Information Institute (iii.org)