A Step-By-Step Guide on How to Choose Home Insurance Coverage
When a storm comes through your area or a fire breaks out due to faulty wiring, home insurance is there to help pay for the damage. Many people know that they need home insurance, but how much coverage is necessary is less well understood. It may be easy to simply purchase any policy without reading through it, but this can lead to inadequate or unnecessary coverage. Rather, learn how much homeowners insurance you need.
What Does Home Insurance Cover?
Before you can determine how much home insurance you need, consider first what it can do for you. There are two main components of home insurance – liability coverage and property coverage. Most home insurance policies cover the following:
- Property Coverage: This component provides financial protection from incidents damaging the structure of the home. This may include fires, theft, vandalism and storm damage.
- Liability Coverage: This component covers incidents in which you are found to be responsible for the losses another person suffers. For example, it can help minimize financial losses related to lawsuits filed against you for a slip-and-fall on your property, dog bites, or tree limbs from your property falling and damaging a neighbor’s vehicle.
- Contents Coverage: The contents of your home are very valuable. Contents insurance, a type of property insurance, covers your possessions if lost under a covered peril. Highly valuable items may need a rider or an additional type of coverage to protect them.
- Additional Living Costs: In some cases, you may have to leave your home while repairs are done to make it safe for you. When this occurs due to a covered peril, the cost may be covered by homeowners insurance. This includes hotel stays, for example.
Every policy is very specific and has conditions and exclusions. Read through your policy to learn what it includes and what it does not.
Your Lender’s Requirements
As you take into consideration how much home coverage you need, start by looking at your mortgage documents. Lenders require that property owners maintain at least enough property damage coverage so that you could pay off the loan in the event of a significant loss, such as a fire. If you are unsure about the lender’s requirements, contact them. Be sure to read through the mortgage documents to know exactly what you can expect. Your insurance company can also help you with this information. It’s important to understand that buying enough coverage to meet your lender’s requirements may not be enough coverage to meet your own needs. The lender cares only about having its loan paid in full, but you care about the additional money you put into the property and the ability to replace or repair any damaged property.
Choosing Home Coverage – How Much Insurance Do You Need?
Home coverage is vitally important to your financial health. If your home was lost, could you afford to replace it?
It is easy to think this will not happen to you. Most people never think they will have to go through something like this. Yet, it does occur. The Insurance Information Institute states that, from 2012 to 2016, almost six percent of homes with insurance had some type of claim, with hail or wind damage being the most common. It also reports that each year, on average, one in every 15 homes has a claim.
Considering these statistics, recognize the importance of having a comprehensive policy in place to protect your needs and those of your family. Take a closer look at some of the key factors to consider when determining how much home insurance you need.
How Much Insurance Do You Need for Your Home’s Structure?
Structure insurance is the base of most policies. It protects the building itself. Most standard home insurance policies cover the home as well as attached structures, such as a garage. Some can also include enclosed patios. If you have a shed, outbuilding, or a detached garage, you will need to factor those elements into the value of your policy. Each one of these structures is at risk.
Consider Rebuilding Costs
One of the key concerns many property owners have is understanding the cost to rebuild their home in the event of a total loss. How much is enough? The cost to rebuild your home is not the same as the price you would get if you sold it. Nor is it the amount you paid for the home. And, it is not the balance of your mortgage debt. Rather, it is the cost to rebuild your home from scratch if an incident occurs that causes the home to be a total loss. There are various factors that impact the rebuilding costs. The two most important factors are the size of the home and local construction costs. Consider these factors as well:
- The type of construction material. For example, framed homes are less expensive to rebuild in some areas than masonry homes. Some materials are hard to find or must be imported.
- The number of bathrooms and other rooms.
- Homes that are multiple stories, such as a colonial, typically cost more to rebuild than a single-story home.
- Special features in the home, such as saunas, fireplaces, or other amenities.
- The type of roof.
- Whether or not the home was custom built (and therefore requires a new custom build).
Over time, you need to revisit this information, especially if you make any changes to your home. Renovating a kitchen, completing a basement, or a home addition will affect rebuilding costs, for example.
Factoring in Construction Costs
It is important to understand all the factors that can affect rebuilding cost, but how do you determine what the actual cost would be? While your home insurance company can offer some guidance, speaking with a local builder can also help. A local builder can help you determine the amount of coverage you would need to rebuild your home from scratch. However, there are more factors to keep in mind as well when calculating how much insurance you need.
How Much Insurance Do You Need for Your Possessions?
The next step in determining the amount of home insurance you need is to think about your possessions. Most standard home insurance policies provide for up to 70 percent of the total insured value of the home to cover possessions. For example, if you purchase a policy to cover the structure for $200,000, you may have up to $140,000 of coverage for contents. This includes almost anything you have in your home – furniture, electronics, collections, toys, and clothing. Your policy protects these items up to a certain value.
Your personal property coverage needs to be enough to cover all of your belongings. Check your policy. If you need more to cover your possessions, speak to your agent. He or she can help you adjust your contents coverage to better match what you own.
High-Value Possessions Need Extra Help
Some policies also place a dollar limit on coverage for the value of a single item. For example, your policy may limit coverage for an individual item to $1,000. Be sure to read the details of your policy and know the limits here. If you have valuables that are worth more than that threshold, you may need to purchase a separate policy endorsement to be sure they are covered.
For example, if you have a piece of jewelry worth $1,500, and that piece is stolen, you will not be paid more than $1,000 in insurance proceeds (using our example above). In this case, you will want to purchase a special personal property floater or endorsement. It is a type of additional policy that names a specific item. You should do this for any high-value items in your home that may be above the maximum peritem coverage you have.
How Much Additional Living Expense Insurance You Need?
The next step is to determine how much additional living expense insurance you should buy. Additional living expenses are those costs you incur when you cannot live in your home after a covered loss. For example, you could have a kitchen fire or a tree could fall on your roof and you may need to move out of until the damage is repaired. Most standard home insurance policies should include additional living expense insurance. The amount of this coverage can differ between companies. It is usually based on a percentage of the property damage coverage you buy for the home, possibly less than 10% but maybe as high as 40%.
Additional living expenses can include the cost of restaurant meals when you cannot cook at home, the cost of a rental property to use while your home is being rebuilt, and other necessary expenses incurred as a direct result of not being able to live in your home for a period of time.
It’s important to know that for most policies, additional living expense coverage may not kick in for three to five days. That means that if the repairs can happen within that timeframe, the insurance company may not cover these expenses. Some policies have a long-term limit, too, which may depend on the cause of the loss. Ask your agent for details.
How Much Liability Insurance Do You Need?
Liability insurance is important but is overlooked by many property owners. Accidents can happen to anyone in any place. For example, your dog could bite a stranger. Your son or daughter may have a friend over who topples off a couch and ends up with an emergency room visit. Or, you could face a lawsuit from someone who slips and falls in your driveway.
If you hire a general contractor without his or her own coverage, you could be responsible for their injuries. Liability insurance is a type of safety net. It covers the cost of claims made against you, such as medical bills for injuries another person sustains. It can also cover other losses those individuals have. For example, if a tree branch from your tree falls onto your neighbor’s shed, your policy can cover the damage to that building. And, if you do face a lawsuit, your policy can cover the cost for an attorney to defend you in a court of law. Liability insurance typically starts at $100,000 on a standard home insurance policy, but you may wish to purchase a higher level of coverage. Most insurers offer as much as $500,000 of coverage on a home insurance policy. To buy a higher amount of liability coverage you may need to buy an additional policy known as an “umbrella” policy which increases the liability coverage on both your home and auto policies. You should buy enough liability coverage to protect your assets and future wages.
Calculating your Homeowners Insurance Premium
From the insurance you need for your home’s structure to the coverage you need for liability risks, there is much to consider here. Property owners benefit from having comprehensive protection and the homeowners insurance premium should cover each one of these components for you. At Plymouth Rock Assurance, our team of insurance professionals will work closely with you to understand what your home insurance needs are. We factor in the cost to rebuild your home, the value of your possessions, and your liability risks to provide you with a clear, accurate quote. You can then adjust the coverage as you see fit. With proper homeowners insurance, you can rest easy knowing you have financial protection in place to minimize risks to you from losses you cannot otherwise control. Let Plymouth Rock help you find an affordable policy that meets your needs.
The information on this page is for informational purposes only and is not professional or expert advice. The definitions and explanations described on this page do not refer to a specific policy, and do not replace or modify the specific terms contained in an individual policy. We make no representations or warranties regarding the completeness, accuracy or suitability of the information on this page. Nothing on this page alters the terms or conditions of any of our policies. Actual coverage is limited to the coverages and limits purchased by each policyholder and is subject to the language of the policy as issued by us.