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What Should Homeowner's Insurance Cover?

While the odds of making a claim against your homeowner's insurance are rare -- of the 96 percent of homeowners who have homeowner's insurance, only about 7 percent of insured homes have damage that results in a claim each year -- the worst time to realize that you don't have enough coverage is after a disaster.

home insurance

Do you have enough insurance coverage to protect your biggest investment -- your home?

Yet, according to California's insurance commissioner, 90 percent of homeowners affected by the California wildfires were underinsured.

Nationwide, a 2006 survey by insurance-services firm Marshall & Swift/Boeckh estimated that 58 percent of homeowners are underinsured and covered only enough to rebuild about 80 percent of their home.

How to Make Sure Your Home is Really Covered

A standard homeowner's insurance policy should cover these four areas of your home and home life:

  1. The structure of your home. Standard policies will typically pay for damage caused by fire, hurricane, hail and lightning, but other disasters, such as a flood or earthquake, are not covered unless you specifically ask for it. You should buy enough coverage to rebuild your home in its entirety, taking into account building costs in your area.

    For both your home's structure and your personal belongings (below) you need to know whether you're insured for replacement cost or actual cash value. Replacement cost will cover what it costs to actually replace the item, while actual cash value only covers what the item is worth on the market today (and used items like your belongings typically won't be worth much).

    For instance, if your eight-year-old stereo is destroyed by a fire, a replacement cost policy will replace your stereo with a new one. However, an actual cash value policy will only pay a fraction of the cost of a new stereo, because it is based on what your used stereo is worth today.

    The price of replacement cost coverage is about 10 percent more than that of actual cash value, according to the Insurance Information Institute.

homeowner's insurance

Experts recommend NOT playing it cheap when it comes to homeowner's insurance. Let your insurance agent know that you're looking for the best coverage, not the cheapest premiums.

  1. Your personal belongings. If your personal belongings are destroyed by an insured disaster or stolen, you'll be reimbursed. Most companies cover about 50 percent to 70 percent of the amount you have for your home's structure, according to the Insurance Information Institute (so if you have $100,000 of coverage for your home's structure, you'd have between $50,000 and $70,000 for your home's belongings). You can determine if you need more than that by taking an inventory of your belongings.

    While expensive personal items like jewelry are typically covered, be aware that they're usually only covered for $1,000 or $2,000. To recoup its full value, you need to take out a personal property endorsement for the item and insure it for its full, appraised value.

  2. Liability protection. This covers you against lawsuits for bodily injury or property damage that you, your family or your pets cause to other people. Experts recommend that you purchase at least $300,000 worth of liability protection, and possibly more.

  3. Additional living expenses. In the event that you can't live in your damaged home, this covers your hotel bills, meals and other living expenses while your home is being rebuilt. Most policies cover you for 20 percent of the insurance on your house.

After you have covered the basics, what can you do to make sure your home is not underinsured? Here's what the experts recommend:

  • Calculate your replacement costs per square foot. Take your policy limits and divide them by your home's square footage. Then compare this amount to a homebuilder's estimates of what it would cost to rebuild your home. They should match up closely.

  • Choose a replacement cost policy, not an actual cash value policy.

  • Make sure your policy pays enough in additional living expenses. You should be covered for two years' worth of living expenses in the event your home must be rebuilt.

  • Take a household inventory of your personal belongings. Make a complete list of your possessions and what it would cost to replace them. It's the only way to know whether you've got enough coverage for your belongings.

  • Get extra coverage when needed. If you own expensive jewelry, art, antiques, etc., take out a floater or a rider to cover them in their entirety. If you live in an area prone to flooding or earthquakes, make sure you're covered for these disasters.

  • Protect yourself from liability. Experts recommend taking out the maximum liability coverage your policy allows, and then taking out an umbrella policy that provides coverage up to $1 million. For people with higher net worths, or with particularly risky situations such as a teenage driver, experts recommend taking out even higher limits.

Finally, remember that once your homeowner's insurance has been settled it is not set in stone. In other words, you should review it regularly and update it for increases in building costs, new purchases, and home improvements that may have increased your home's value.

This will give you peace of mind in knowing you have the coverage necessary to replace your home and valuables, and will come out on top, even if a disaster occurs.

Recommended Reading

How Much Insurance Should You Have ... for Home, Auto, Health and More

How to File an Insurance Claim so You Will Likely WIN It: An Insider's Guide


Insurance Information Institute

MSN Money

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