Is Your Home Underinsured?
If your home burned down in a fire, would you have enough homeowners insurance to restore your home and replace all of your belongings? Would your policy give you enough money for a place to live while your home was being rebuilt? Some policies contain a provision called Loss of Use, which pays for your living accommodations, meals, etc. while your home is being repaired or replaced. Does your policy have this provision? If you’re like most Americans, the answer to all of these questions is “no.” Many homeowners are severely underinsured, which would render them unable to live the quality of life they enjoyed before the disaster struck.
Ignorance Is Bliss
The problem of homeowners being inadequately insured is part negligence, part ignorance. Some policyholders spent thousands and thousands of dollars renovating or remodeling their homes without giving a thought to updating their home insurance policies. The home will have increased in value, but your policy remains the same, leaving you dangerously underinsured. A recent survey found that 66% of U.S. homes are undervalued for home insurance purposes by an average of 18%. The best way to combat this is to notify your home insurance company of any additions or renovations you make to your home as soon as possible.
How Much Coverage Is Enough
You may not even know how much insurance coverage you need in the first place. To determine this, you should make sure you have enough home insurance to cover the complete loss of your home (at its current appraised value) and all of your possessions. Update your policy annually to make sure it includes all of your personal belongings. Here are the four main categories of home insurance to consider when updating your policy:
- Structure(s). You want to have home insurance coverage at least equal to the amount of your mortgage loan. Make sure your policy covers the cost of rebuilding. If you do any remodeling, update your coverage to include these improvements.
- Personal belongings. Home insurance policies also cover your personal property. You usually have a choice between actual cash value coverage (the current value of the item less depreciation) and replacement cost coverage (how much it would cost to buy the item new today). If you have very valuable items, such as high-end electronics or expensive jewelry, you should consider purchasing additional protection for these items.
- Liability. The standard home insurance policy offers liability protection of up to $100,000. However, for homes with dogs or swimming pools, your liability exposure is higher, so you might want to up this limit to protect your assets.
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