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.
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:
- 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
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
The price of replacement cost coverage is about 10 percent
more than that of actual cash value, according to the
Insurance Information Institute.
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
- 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.
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.
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
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
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.
Much Insurance Should You Have ... for Home, Auto, Health
to File an Insurance Claim so You Will Likely WIN It: An Insider's
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