Home values have dropped across the nation. But that doesn’t mean you should reduce the coverage under your home insurance policy.
Why? The real estate value of your home is very different from the rebuilding cost. You could wind up seriously underinsured, says the Insurance Information Institute, a nonprofit group supported by the insurance industry. It suggests asking these key questions about your policy:
1. Do I have enough insurance to rebuild my home?
Your policy needs to cover the cost of rebuilding your home at current construction costs. The cost to rebuild your home is not based on the price you paid for your home, the real estate value in today’s market or even the cost of new construction, the III says. Rebuilding costs are often higher than new construction costs because of demolition and debris removal fees.
Extra coverage you should check on:
- Water back-up (damage from sewer or drain backup)
- Disaster coverage (floods and earthquake aren’t covered on the typical policy, and wind damage may or may not be)
- Building code upgrade, also known as ordinance or law coverage (pays for additional expense of rebuilding your home to comply with building codes that didn’t exist when the home was originally built).
2. Do I have enough insurance to replace all of my possessions?
Most homeowner policies provide coverage for your personal possessions of about 50 percent to 70 percent of the amount of insurance you have on the structure of your home. For example, if you have $100,000 worth of coverage on the structure, you would be covered for $50,000 to $70,000 worth of the contents of your home. You may need more, particularly if you own antiques, guns, furs, expensive jewelry and artwork or business equipment–all of which may require separate “riders” to ensure adequate coverage.
You can insure your possessions in two ways: Actual cash value or their replacement cost. Actual cash value is the amount it would take to repair or replace your belongings — minus depreciation. That $1,000 sofa may be only worth $50 today, which is all you’d get under an actual cash value system. A better bet: Replacement cost, which gives you the amount it would take to replace your belongings with items of comparable value and quality without deducting for depreciation.
3. Do I have enough insurance to protect my assets?
Home insurance also provides liability protection, which covers you against lawsuits for bodily injury or property damage that you or your family members cause to other people. The coverage pays for the cost of going to court (your defense) and court awards – up to the limit of your policy.
Most standard home and renter’s insurance policies provide at least $100,000 of liability coverage, but additional protection is available. You want to make sure you have enough insurance to protect your assets and finances should someone sue you. A good rule of thumb is to have liability insurance at least equal to your net worth. Even better: Get enough to cover twice your net worth. Extra liability coverage is not that expensive, and if you max out the available coverage on your policy you can get an “umbrella” policy that gives you $1 million or more for $200 to $300 a year.
Want to know more? Check out my columns for more tips:
- Is your home underinsured? 8 key points
- 3 costly myths about insurance
- Homeowners, demand your (insurance) rights