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How Much Homeowners Insurance You Should Buy

By: David Bach  |  Last Updated: October 5, 2020
Financial Expert & 10x New York Times Bestseller
This content was originally published on Money.com
IN THIS ARTICLEFocus on replacement costs
Know your coverage areas
Liability coverage is critical
Circumstances change over time
Cover the contents
Keep costs under control

If you’re a new homeowner trying to figure out how much insurance coverage to buy, think back to the popular childhood fable, Goldilocks and the Three Bears, and keep the Goldilocks Principle in mind: Not too much, not too little, but just right.

If you get too much insurance – either in total amounts or areas of coverage you don’t really need – then you could be looking at super expensive premiums on an annual basis. If you buy too little and disaster strikes, your costs for repairing and rebuilding could be far beyond what your policy covers, leaving you with a massive bill to cover out-of-pocket.

When it comes to homeownership, “the biggest danger we see arise most frequently is underinsurance,” says Carmen Balber, executive director of the Los Angeles-based group Consumer Watchdog. “That is by far the biggest problem homeowners run into: When an unfortunate event occurs and they have to file a claim.”

The statistics bear her out: Around 60% of U.S. homes are underinsured, by an average of 20%, according to data firm CoreLogic.

That’s not necessarily because most homeowners are cheap and trying to skimp. It might be because they haven’t really thought about their policy since they first took it out, or because they don’t fully grasp the ins and outs of proper coverage in the first place. In fact, more than half (52%) of policy owners don’t have a complete understanding of their insurance, according to a survey by J.D. Power.

It’s hard to blame them. Home insurance is tricky business – and in this era of climate change, it’s hard to tell what kind of calamity might befall us and our homes. The good news is, people are being much more thoughtful about protecting themselves, says Janet Ruiz, a spokesperson for the Insurance Information Institute: “Catastrophes seem to be occurring on a regular basis: Hurricanes, floods, wildfires, earthquakes. So people are paying more attention to insurance these days. And that’s a very smart thing, because your financial stability depends on it.”

In addition to natural disasters, we also have to contend with the Covid-19 pandemic today. While the pandemic won’t affect the basic principles of home coverage, many insurers — Allstate, for example — are taking economic hardship into consideration and allowing customers to temporarily pause or reduce premiums without penalty or cancellation (although the difference will have to be made up down the line). 

If you have moved your work into your home for the foreseeable future, you might want to look into what’s called a home business endorsement, or raising coverage limits for the business property you’re using.

Here are a few tips from the experts to put that Goldilocks Principle into action and get the perfect amount of coverage for you:

Focus on replacement costs

You’re not really aiming to insure the full market value of your property because that includes the land, and the land isn’t going anywhere. And you should probably look to insure more than just the actual cash value of the structure because, thanks to factors like inflation, depreciation and rising construction costs, that may not turn out to be enough to rebuild after a disaster.

There’s an elegant solution: Insure the replacement cost, which is the rough estimate of how much it would take in labor and materials to repair and rebuild the entire home. Premiums might be 10-15% more than if you were just insuring the cash value, but it will be well worth it if you ever have to file a claim. Even better, advises Balber: Get “extended replacement cost” coverage, which covers you even if local building costs skyrocket in the wake of disaster (which often happens).

Know your coverage areas

Standard homeowner policies cover some areas of damage, but not others. In this era of climate change and rising tides, research what your area is prone to and if you’re covered for it – if you’re not, look into additional riders with your existing company or secure the necessary coverage through a separate insurer.

Flooding, for instance, is generally not covered in standard homeowner policies. The National Flood Insurance Program can hook you up with participating local brokers. The program covers dwellings up to $250,000 and contents up to $100,000, with an average annual premium of around $700, although coverage in lower-risk areas won’t cost as much.

Other areas that are typically not covered, but could be, include things like sewer backup and personal collectibles, like jewelry and artwork.

Liability coverage is critical

You may think of home insurance as just relating to the structure, but really, it’s much more than that. If someone falls and injures themselves seriously on your property, they could theoretically sue for some, or even all, of your assets.

That’s where liability coverage comes in handy. Typical homeowner policies offer at least $100,000 in liability coverage, but you can certainly go higher and take out $300,000 or even $500,000. If you have more assets to protect, get what’s called an “umbrella” policy over and above that amount. A million bucks of coverage costs a few hundred bucks a year and is well worth the peace of mind.

Circumstances change over time

Let’s say that your home insurance amount was perfect for when you first took out the policy. That doesn’t mean it’s still appropriate today.

You may have taken on various home-improvement projects, like bathroom and kitchen remodels, that boosted total replacement costs. Perhaps your home is now worth $400,000, but your coverage is only for $300,000. That’s a problem.

Or maybe your town has become a popular location, homebuilders are in high demand and their costs have gone up. Make sure your coverage takes that into account. (Multiply square footage by current local per-square-foot building costs, which the local builders’ or realtors’ association should be able to tell you.) In a similar way, locking in an “inflation guard” rider can help protect you for increased building costs 10 or 20 years down the road.

Cover the contents

It’s not just four walls and a roof that make a home valuable – it’s what’s inside. Generally speaking, contents can be insured up to a percentage of the structure’s overall value – roughly between 50-75%, says Ruiz.

It’s important to document those contents. That way, you won’t have to haggle with your insurance company when you have to file a claim. Perform a video inventory using an app like Sortly or Nest Egg and then upload the results off-site.

Keep costs under control

It’s easy to instruct you to get as much insurance coverage as you possibly can, but that can be pricey, so take thoughtful steps to help keep those premiums under control. Bundling homeowner policies with other areas of coverage, like your auto insurance, could save you up to 30%. Raising your deductible – from $500 to $1,000, for example – could save you up to 25%. Avoid filing multiple, minor claims if you don’t have to, which could make insurers nervous and prevent them from renewing your policy.

If your insurer is hiking up your rates, check to see if there is better or more affordable coverage out there. Insure.com is a useful resource to use to get insurance quotes, says Ruiz. Independent brokers – those not beholden to a single company – are often savvy shoppers. And state insurance departments often have rate-comparison tools of their own.

Most importantly, don’t just let your policy gather dust in a drawer for years. Actively review whether you have the coverage that you need. “When renewals come in the mail every year, take some time, look it over and call your agent,” says Ruiz. “It’s worth every second of your time.”

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