Do I have enough insurance? That is a question that every homeowner wants to know. An annual review of your policy and local new home building costs will help you determine if you need more insurance.
Homeowner’s insurance also known as hazard insurance is an insurance policy that will protect your home, furnishings, and valuables in case of a disaster. You should know your policy limits and exclusions as well as know what your deductibles are. In order to identify homeowner’s insurance policy gaps, you need to gather some information.
Start with a policy review
Get a copy of your current homeowner’s policy and look at your coverage amounts and the type of coverage you have. Then look at your deductibles. Note any exclusions the policy may have to water damage, natural disasters, and mold. Now you have a good idea of what your actual coverage is. Find out if you have replacement coverage or if you have a set limit on what the policy will pay out.
What will it cost to replace the house?
Find out the assessed value of your home–what the taxman uses to determine your property tax. Then find out what similar homes are selling for in your area. Now you know the current value of your home. Get an idea of what new construction on a home of similar size, style and materials will cost. If your house was destroyed tomorrow, this would be what it would cost to rebuild it. Compare the cost to rebuild your home right now to the limits on your policy. If there is not enough insurance to rebuild your home, you need to make adjustments to the policy.
Replacement costs are another item that usually is not in sync with current values. You want this amount to show at least the amount it would cost to rebuild your house from the ground up tomorrow, then add 10% to that figure. The ideal policy guarantees cost replacement at current rates, not just a replacement clause. Make sure that this number is accurate and will cover you for at least 1 year. Unless you live in a very remote area of the US, this figure should not be under $200,000.00. In most areas, it should be significantly higher. Do not confuse replacement cost with real estate value. What you are looking for is a cost per square foot to rebuild your house. In many areas, this is $105 or more. If you have a 2,000 square foot home, the cost to rebuild would be $210,000.
What about floods?
Your homeowner’s policy does not cover for flood damage. You must have federal flood insurance to be covered for damage due to flooding. It is relatively inexpensive and everyone should have it. All it takes is one flash flood to wipe out your basement, and you will be footing the bill to replace everything without flood insurance.
Consider personal property
Homeowner’s insurance policy gaps usually include personal property. Jewelry, electronics, collectibles, high-end toys, art, musical instruments, furs, antiques, require a special rider. Add up the current replacement value for all of your personal property and compare this to your current homeowner’s policy will cover it. If it is lacking, call your agent and get the proper riders. Adjust the insurance coverage to accurately reflect your situation. You want the policy to read replacement value, where they have to replace the items with similar items you own. This is more expensive but it is worth it if you suffer a loss.
Check deductible and liability amounts
Your deductible and your liability amounts are other areas to consider. Deductibles should be low enough so that if you make a claim, you can comfortably absorb the deductible amount. The liability amount should be large enough to pay for an overnight stay at the hospital plus emergency room and other fees if someone were to get injured on your property. If you have a lot of assets, you may want to talk to your insurance agent about an umbrella policy for additional coverage. This is important if you are making a good salary, are coaching, on a board of any organization, or have a lot of financial assets. If someone were to sue you, this will cover you above what your homeowners will. Many people who should have this coverage do not.
This is just a quick overview of how to identify homeowner’s insurance policy gaps. Keep in mind that everyone’s situation is different. Insurance should cover you for the unexpected. I was glad I was covered when my satellite dish was struck by lightning. Now is the time to review your homeowner’s insurance policy for gaps, before a disaster strikes.