Updated: Apr 27
If a disaster destroys your home, you will want enough homeowners insurance to rebuild and replace your belongings, to cover costs if you are unable to stay in your home and protect your financial assets. People that live in areas where there is a risk of flood or earthquake will need additional coverage for those disasters. In every case, you will want the limits on your policy to be high enough to cover the cost of rebuilding your home.
The home purchase price or the current market price may be more or less than the cost to rebuild. Therefore, if the limit of your insurance policy centers around your mortgage, it may not cover the cost of rebuilding.
Mortgage lenders require homeowners insurance
Auto insurance is a state requirement, and homeowners insurance is not. However, if you are financing your house, you need to have it. Home insurance guards your lender's investment. Should you fail to keep your dwelling adequately insured, most lenders will purchase a homeowners policy in your name and add the costly payments to your monthly mortgage tab.
The average homeowners premium costs between $350 and $1,200 a year depending on a range of factors, including the age and location of the house, the cost to rebuild it should be catastrophe strike, the value of the personal property, and the deductibles you choose.
Other factors like your dog's breed, a pool, or a trampoline, could also affect policy rates.
What could impact home rebuilding costs?
The type of exterior wall construction
The style of the house
The number of bathrooms
The type of roof
Other structures on the premises
Fireplaces, exterior trim or arched windows
Is it custom-built?
Improvements that added value to your home
When purchasing or renewing your homeowners insurance, make sure your home policy pays out damages on a replacement cost estimate to be sure you are getting the most financial protection possible.
Be sure your home is up to code
Building codes are periodically updated and may have changed. If you have to rebuild your home, you may be required to rebuild your home to the new codes. If you think that the elements of your home are not up to current building codes, you can get an endorsement to your policy called an Ordinance or Law. During a covered repair, it pays a specified amount to bring a house up to code.
What about older homes with hard-to-replace features?
Older homes can have some lovely special features like wall and ceiling moldings and carvings. These features are expensive to recreate, and some insurance companies, for that reason, do not offer replacement policies.
In this case, buy a modified replacement cost policy for your older home. The policy will cover repairs using today's standard building materials and construction techniques. You are much more likely to be satisfied with the results.
What about the possible increased cost of building materials?
Inflation impacts rebuilding costs. If you are buying for the long haul, you should consider adding an inflation guard clause to your policy. It will automatically adjust the dwelling limit to reflect current construction costs in your area when you renew your insurance. In other words, after a significant unforeseen catastrophe, construction costs may increase because of the price of building materials, labor, and construction workers increases due to the high demand. The price bump can push rebuilding costs above your homeowners policy limits and leave you shorthanded.
A guaranteed replacement cost policy will rebuild your home as it was before the disaster. Also, an extended replacement cost policy will pay an extra 20 percent above the limits.
Conducting a home inventory of personal possessions
A detailed list of your belongings will help you figure out how much insurance you need and serve as a convenient record. It also makes filing a claim much easier.
Your policy should protect your stuff anywhere in the world, whether it is at your place, in the car, with your kid at school, or in storage. If your laptop gets stolen while you are at the gym, your homeowners policy can step in to replace it.
Expensive items have coverage limits. Items such as jewelry, collectibles, silverware, and furs may be limited to under $2,000. Some insurance companies place a limit on what they will pay for computers as well.
Additional living expense insurance
Additional Living Expenses are an essential feature of a standard homeowners insurance policy. It pays an additional cost of temporary living elsewhere when you are not able to live in your home due to a covered loss. Things that are covered:
Rent to stay with a family member or friend
Rent loss if you rent out part of your house
and other living expenses incurred while your home is being rebuilt.
How much liability insurance do you need?
Liability coverage covers you against lawsuits for bodily injury or property damage that you or family members or pets cause to other people. It also covers court costs incurred and damages awarded.
It is best to have enough liability insurance to protect your assets. Most policies provide a minimum of $100,000 worth of liability insurance. However, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of liability coverage.
Remember, you are responsible for ma number of injuries that can occur on your property that might not seem fair. The mailman slipping on your icy walkway or the neighborhood kid takes a dip in your pool and slips on the deck, you may be held liable and held legally responsible.
What about an umbrella or excess liability policy?
These policies protect over and above your standard home or auto liability policy limits. They start to pay after you have exhausted the liability insurance in your underlying policy. Indeed, they offer broader coverage than standard policies.
CEO and Co-Founder of linqrs mobile app, The Most Clever Way to Shop for Insurance. Former Insurance Agency Owner, College and NFL football coach.