Crucial Home Insurance Policy Components
To find out how much home insurance you need, consider the three crucial areas that make up your total policy coverage:
These three areas will make up your policy’s dwelling coverage, personal property coverage, and personal liability coverage.
To start, consider the value of your home, belongings, and total assets. Many homeowners will also want to add an endorsement or rider to their policy for extra protection.
Additional coverage can be a good choice if you live in an area prone to natural disasters, have several high-value assets, or own expensive jewelry or antiques.
Your Home’s Rebuild Cost
Many homeowners mistakenly insure their homes according to the home’s value. But market value can fall short of the total cost to rebuild your home.
If there’s a wildfire, a windstorm, or another disaster, the cost to rebuild can be significantly higher than the value of the home. You could end up paying out of pocket to make up the difference.
Two significant factors that impact your home’s rebuilding cost are local construction costs and the home’s square footage. According to the Insurance Information Institute, other details can also have a big impact on the price:
Exterior wall construction: Frame, veneer, or brick or stone masonry
Roof: Type of roof and roofing materials
Construction style: For example, ranch vs. colonial construction
Number of rooms: Bathrooms, bedrooms, and other rooms
Special features: Fireplace, arched windows, or custom-built design
Other structures: Such as a garage, shed, or pool
Your insurer will recommend a dwelling coverage limit, which includes your home’s physical structure and attached structures, such as an attached garage.
You can double-check the coverage limit by multiplying your home’s square footage by the average building cost per square foot in your local area. To find out the average square-foot cost, contact a local contractor.
Keep in mind that this DIY method provides a very rough estimate and may not accurately assess the amount of dwelling coverage you might need.
Consider Additional Rebuild Coverage
While most standard homeowners insurance policies offer essential protection, opting for additional coverage can give you peace of mind.
For instance, the cost to rebuild your home can vary over time. Building codes can change, and construction and material costs can rise. If that happens, you may not have enough insurance to cover the total rebuild cost if it’s been a while since you purchased your policy.
You should also consider the type of replacement cost value in your policy. Standard homeowners insurance policies generally include replacement cost value (RCV), which limits your payout to a certain amount.
If you opt for guaranteed or extended replacement cost, your coverage amount will be higher than your policy limit. Having extended coverage can pay higher limits and reduce the amount you’ll be responsible for.
Extended Replacement Cost
Most homeowners insurance includes replacement cost coverage, which insures the home at its replacement cost value (RCV). Your dwelling coverage amount under RCV will pay today’s prices to replace or repair your home with the same or similar materials.
But what if a shortage of material or workers causes a sudden spike in building or construction costs? The RCV limit in your policy may not be enough to cover the total price to replace your home.
On the other hand, extended replacement cost can increase your coverage limit by 20 percent or more, depending on your insurance company. It’s an upgrade you can add to your insurance policy with an endorsement. Because it extends your dwelling coverage above your policy limits, you may pay a little more for your policy premium. But the difference could more than pay for itself if a wildfire or disaster sweeps through your area.
Inflation Guard
You’ve likely seen the effects of inflation on the price of consumer goods; the cost of a gallon of milk or a pair of jeans is higher than it was 10 or 20 years ago. Inflation also impacts your home’s dwelling coverage.
With inflation guard coverage, your dwelling limit automatically adjusts when you renew your policy to factor in inflation.
Rather than take a chance of having to pay the difference out of your pocket, ask your insurance company about adding inflation guard to your policy. Your insurer may include it or offer it as a separate policy.
Ordinance or Law Coverage
Ordinances, laws, and building codes can change over the years. If you own an older home, you might encounter new guidelines that didn’t exist when the house was originally built, and the changes can increase the cost to rebuild your home.
Ordinance or law coverage is an optional endorsement for your homeowners insurance policy. It covers the additional expense of rebuilding your home to comply with current ordinances, laws, and building codes.
Coverage for Your Personal Items
Your homeowners policy includes coverage for your personal items. Standard policies will pay to replace your furniture, clothes, sporting equipment, and other personal belongings if they’re stolen or damaged by a disaster that’s covered by your insurance.
Your policy generally covers your belongings at 50 to 70 percent of your dwelling coverage. For example, the policy limit for your personal possessions would be $110,000 to $154,000 for a home that’s insured for $220,000.
The limit may be the right amount, but it depends on what you own. The best way to find out if you have enough insurance for your items is to create a home inventory.
It can seem daunting to list everything you own on paper, but technology can ease the burden. The Insurance Information Institute suggests taking pictures, recording a video while describing the items, or using a home inventory app.
Pay special attention to the more expensive items you might own, such as jewelry, furs, fine art, or collectibles. Standard homeowners policies generally include those types of things but can limit the amount of coverage. Your insurer can offer additional protection as a personal property rider to insure your items to their full value.
Personal Liability Coverage
If someone is hurt or injured in your home, personal liability coverage protects you if they decide to sue you. It also pays for damage you, your family members, and your pets may cause other people. How much coverage do you think you’ll need if that happens?
Standard liability limits are around $100,000. In a lawsuit, the injured party can go after all of your assets. Depending on the value of your assets, you may want to talk to your insurance agent about purchasing additional liability protection.
Additional Living Expenses Coverage
Another name for additional living expenses (ALE) coverage is “loss of use.” It covers the additional expenses you incur if you must live away from your home due to damage or a mandatory evacuation.
For instance, if a fire damages your home and you’re unable to live there for two months while it’s being repaired, ALE coverage can pay for:
Hotel bills
Restaurant meals
Car rental
Other expenses
Standard homeowners insurance covers ALE but can cap coverage at about 20 percent of your home’s insured value.
The standard amount might not be enough if you live in an area with a high cost of living. It can vary from policy to policy, so check with your insurer to find out what yours covers and how to purchase additional insurance if you need it.
