How to Buy the Right Amount of Homeowner’s Insurance
Point of Interest
No one can see the future, so your best approach when trying to buy the right amount of home insurance is to evaluate your home and belongings and determine your potential risks. Once you know what you need, shop for the best coverage out there and select what you think is best with the information you have on hand.
Determining how to buy the right amount of home insurance can be tricky, especially if this is your first time navigating the process. The list of what’s covered, what’s not covered and the additional options you have to choose from can be overwhelming. No one wants to pay for insurance coverage they don’t need, but no one wants to be left footing the bill because they had inadequate coverage either.
While there is no blanket answer to the question of how much homeowner’s insurance you need, there are some tips and bits of information that can help you to choose the right policy for your home.
What is homeowner’s insurance?
Homeowner’s insurance is a policy agreement between a homeowner and an insurer. The homeowner pays a monthly premium for coverage from different incidents that can occur on, or to, the covered property. If something on your home is stolen or damaged and it meets the coverage specifications of your policy, you can make a claim to request the insurer pay for the repairs or replacement.
If you’re familiar with car insurance, this is fairly similar, except the coverage is for your home. Much like most car insurance arrangements, homeowners will need to pay a deductible on claims they make. A deductible is a minimum payment you must make on a claim before the insurer steps in to cover additional costs. The size of the deductible you choose will have an effect on the overall cost of your policy.
While homeowners insurance is not required by law, it is advised to have coverage, and any mortgage lender you choose for your home loan will require you to carry it on your home. If you paid cash for your home and opt out of homeowners coverage, you will need to find the money to pay out of pocket for all expenses in the event that your home is damaged.
You may feel as though you’re saving money by not having insurance when nothing is breaking, but a single damage incident can cost thousands and quickly erase all those savings.
What does home insurance cover?
While each policy can be different, homeowner’s insurance typically covers damage to the interior and exterior of the home, the loss of personal assets and injuries to visitors from accidents that occur on your property. Some standard policies will also cover the cost to stay elsewhere while the home is being repaired.
Basic policies often cover loss from fire, hail, lightning strikes, theft, vandalism, damage from vehicles, riots, along with wind and tornadoes in some cases. Expanded coverage, often known as broad form coverage, can be added to include damage from water (not flooding), household appliances, plumbing, heating and air systems, falling objects and the freezing of household systems.
Typically, things like earthquake damage, flood coverage, neglect, mold, intentional loss, smog, rust, corrosion and pet damage are not covered under basic or broad form plans. Some insurers will offer more comprehensive coverage or specialty policies you can add on to cover some of these things. Those that live in areas prone to these types of damage may want to seriously consider added coverage, and it may be required by your mortgage lender in those cases. If your insurer does not offer these additional forms of coverage you want, you can always pick up a second policy with another company.
How much homeowner’s insurance will I need on my home?
Deciding how much homeowner’s insurance to purchase for your home should not be taken lightly. While the dream is never to need to use your policy, you’ll be thankful you took the time to choose the right plan and adequate coverage if and when you need to use it.
Most quality insurers are going to help lay out the different options you have and what is and what is not covered, but you will still need to do your homework to confirm that everything you need is covered. For example, some policies will cover water damage but not flood damage, which will require a separate policy. On first glance, it may seem like your home is covered from floods, but the water damage covered will be for specific situations and you need to know that before you purchase the policy.
Regarding the actual dollar amount of coverage, you’ll first want to make sure your policy fully covers the cost of rebuilding your home. This is known as the replacement cost, and very well may be different than what you paid for the home. Replacement cost means the actual dollar amount it will take to rebuild the home if it is damaged or destroyed. Remember, the cost to build your home five years ago may be different than the cost to rebuild it now due to new building and permitting codes, a change in the cost or availability of materials, and any upgrades or additions you’ve made to the home.
Additionally, you’ll need to calculate the level of personal property coverage you want and need. This is the part of your policy that covers the things inside of your home. While some people opt for lower coverage, it’s usually best to get enough coverage in case you were to lose everything in your home. Again, you don’t know what life has in store for you, and you won’t get a warning in the mail before damage is done. Keep in mind that homeowners policies often cover your personal property at a percentage, not at the full value, so you’ll want to be sure of what percentage your homeowners policy covers your property at before you buy it.
Once you’ve determined exactly what you need to be covered, you should shop the different homeowner’s insurance options available. Compare the options by the quality of the insurer, the ease or difficulty of the process to file a claim, the size of your deductible, any coverage limits and limitations and the cost of your premiums. This is the time to be nit-picky and dig through every line of a potential policy.
How much liability insurance should I have?
Most homeowner’s insurance policies come with a base of $100,000 in liability coverage to cover anything that happens to someone while on their property. With standard policies, this often covers you against lawsuits for bodily injury or property damage that you, your family and even your pets cause to others. Additionally, these policies typically provide no-fault medical coverage for people in your home or on your property.
There are limitations, though. Most standard policies do not cover purposefully inflicted injury, damage to business you run out of your home and damage caused by certain breeds of dog. You will want to read the fine print on your policy to see all exclusions.
For some, this may be adequate. However, for others, you may want to consider boosting your coverage.
The decision to up your coverage should be dependent on the value of your assets, lawsuit limits (or lack of) in your area and the potential risks for injury on your property. Many insurers offer much larger policies for a reasonable increase in your premium. It’s best to be a little overprotected than to be under-protected in case something unexpected happens.
Should I buy extra personal property coverage or living expenses coverage?
When you’re shopping for homeowner’s insurance, you’ll see a multitude of different coverage options you can add to your policy. Two of the more common add-ons include extra personal property coverage and additional living expenses (ALE).
Many standard homeowner’s policies have limits on specific items or types of items. For example, you may find something like a $1,500 limit on jewelry. If you have significantly more jewelry, you may be interested in extra personal property coverage. Items like collectibles, cash, electronics, jewelry, precious metals, firearms, and fine art are often covered, but with limitations on the amount of money you can collect with a claim.
Additional living expense (ALE) coverage kicks in when you need to leave your home during repairs from a claim. Most ALE coverage is good for hotel rooms, restaurant bills and other expenses you incur as a result of being out of your home during a claim fix. Many policies carry some level of ALE coverage, but the specifics will vary greatly. When shopping plans, determine if the coverage is adequate. If not, consider your options and the cost of increasing coverage.