How Much Coverage Do I Need for Home Insurance?
Home insurance is the best possible way to make sure that you can recover if your home or its contents are damaged. Asking yourself how much homeowners insurance coverage you need is certainly a reasonable question, but it’s not easy to answer, simply because there really isn’t a “one size fits all approach.” How much you should spend on home insurance depends on how much property you have, and how much of it you want to insure.
There are five basic things that your homeowners insurance policy will usually cover. They are:
- Your Dwelling: Your home insurance pays for damage to your home and any structures that are attached to it, like a garage.
- Other Structures: This would include a freestanding garage, a barn, a shed, a fence, and any other structure that doesn’t actually make up part of your home.
- Loss of Use: If you’re out of your home for any length of time because it’s been damaged and is being fixed, your homeowners insurance policy will pay for you to stay in a hotel or apartment until the work is completed.
- Personal Possessions: Your homeowners insurance policy pays for loss of, or damage to, your personal possessions even if they’re not actually in your home. For instance, if you have tools in your vehicle and they’re stolen, your homeowners insurance policy will pay to replace them.
- Personal Liability: If someone is hurt on your property, your homeowners insurance policy will come good for the cost of their injuries.
Of all these factors, the ones that most affect the cost of your homeowners insurance coverage are your dwelling and your possessions.
How Much For the House?
The amount of homeowners insurance coverage that you buy should provide you with full replacement cost if your home is destroyed. That doesn’t mean you insure your home for the amount it’s appraised for, or what you owe on your mortgage. It means that you should be insured for the full cost of rebuilding your home, in its present location, with comparable materials, in the event that it should be destroyed.
What About the Possessions?
You also want to make sure that you’re covered for loss of your possessions if a disaster should occur. Think about what you’d lose if your house were to be destroyed. You’d lose your furniture, your appliances, your clothing, hobby materials, even your toiletry items. Ideally, you should inventory your personal items so that you have a good idea of what you’ve lost if the worst should occur, but realistically, no home insurance adjuster is going to expect to see a list that has items like “toothbrushes - 3.” Also, most people simply don’t inventory the contents of their home, so you may end up having to come up with a “best guess” estimate when you’re considering how much homeowners insurance coverage to buy. The accepted rule of thumb is to insure the contents of your house at somewhere between 50% and 75% of the homeowners insurance coverage that you have on the dwelling itself.
Most people don’t want to think about something horrible happening on their property, but it can, and does, happen. If your dog bites a delivery person, or someone falls off your deck at a party and breaks a leg, or if you hire someone to paint your shutters and they fall off the ladder and get hurt, then as a homeowner, you can be liable.
Many homeowners become tempted to reduce their homeowners insurance coverage when property rates go down in their neighborhood. This can be a mistake. You’re not looking at what your home is valued at - replacement cost has absolutely nothing to do with market value. If you’re watching the markets, you’re better off looking at the costs of labor and materials if you should have to rebuild, and adjusting your homeowners insurance coverage accordingly.
Keep in mind, too, that if you live in certain areas, you may need to pay more for your home insurance. In fact, you may have to buy additional coverage to indemnify you against things like floods and earthquakes. Never assume that you’re covered for every type of risk. And if you’re a mortgage holder, remember that just because your bank doesn’t require you to have a certain type of homeowners insurance coverage, that doesn’t necessarily mean that you don’t need it.
Consider Your Deductible
Your deductible is what you’ll be responsible for, out of your own pocket, when you submit an insurance claim. The higher the deductible, the lower your monthly rate. The lower the deductible, the higher the rate. Generally speaking, you should go with the highest deductible you think you can afford. Fortunately, the likelihood of you having to make a claim is low. That’s why home insurance companies are able to make huge amounts of money - they’re playing the odds, and the odds are that nothing is going to happen. So you should play the odds too. The chances are that if you ever need to make a claim, you’ll already have saved enough in lower premiums over the years to cover the deductible if the worst happens.
A good home insurance agent can give you more information about deductibles, and help you get the best deal.