How Much Homeowner’s Insurance Is Enough?
By Michael Allen
June 23, 2008
ALL mortgage lenders require homeowner’s insurance. They want to make sure that if anything happens to your home, the balance of the loan is paid. But many people don’t realize that they may need more coverage than that required by the lender.
In most states, homeowner’s insurance covers three major “risks”…
- The actual structure of your home.
- Most policies also automatically cover your belongings that are in the home, up to a specified amount, usually around 55% of the home valuation.
- Liability coverage in case someone else is injured on your property.
Your home itself should have enough coverage to rebuild it at current construction costs. That could be more or less than the amount you paid for it, and will likely be higher than the amount of your mortgage. Your mortgage lender will probably only require you to have insurance for the amount of the mortgage, so considering additional coverage is wise.
The term here is “replacement cost coverage” and it will cost you more, but you will be very glad you bought it in case of a fire that destroys most or all of your home. In my lifetime (yeah, I know, that’s a loooong time) I have known at least 4 friends and two business associates who have lost their homes to fire. So please don’t say, “well that would never happen to me….”
So, trust me, it can! Don’t believe me, then just watch the local news for a few days and the national news for a few weeks and you will see these things happening to lots of people just like you…
Plus, in the event of large scale disasters effecting many homes such as a hurricanes, tornados, mudslides, earthquakes, floods, forest or large scale grass fires, building costs rise. That means your policy limits will likely be less than the cost to rebuild. Replacement cost policies are usually available that pay more than the standard policy limits in such situations.
Typically a “homeowner’s” policy includes coverage for your personal property in your home in addition to the house itself. In addition, most policies cover your personal belongings not at your home too. What this usually amounts to is coverage of personal property such as cameras, computers, guns, or other property of value which you have in your car. Your auto policy does not normally cover personal property in the auto. That is covered with the homeowner’s policy.
If you have high value items such as gun collections, expensive jewelry, furs, art work, etc. your insurance company will normally “schedule” these items (at extra cost, of course!) to be sure they are completely covered in case of loss. Some companies even want you to buy an electronic products rider for all the “gear” we have in this electronic age. These are usually very cheap, like maybe $10-$20 per year!
Most homeowner’s insurance covers your living expenses should you be unable to live in your home after a covered disaster. That means that the policy will pay for a hotel room and your meals while your house is being rebuilt. If you feel that the limits of this coverage are too low, you may be able to increase them for a higher premium.
Homeowner’s insurance also covers liability to a certain extent. If someone is injured or incurs damage to their property while on your property, the coverage will include your court costs and damages up to a specified amount, typically about $100,000. Whether you need additional coverage depends on your specific situation.
The only way to really know how much homeowner’s insurance you need is to have a discussion with your insurance agent to go over all these issues. They should show you the options for additional coverages and they will also know what the mortgage company will require at minimum.
Adequate homeowner’s insurance is important in case anything happens to your home or belongings. Getting proper coverage when you purchase your home and keeping it after your mortgage is paid off can give you peace of mind. Most importantly it will give you your life back in the event of a major loss. At least that’s the way it will feel.
The last thing to remember on this issue is the old saying… it pays to shop around! Don’t just take the first quote you get, but get at least three and more is better. You will be amazed how much difference there can be in pricing.
For more details on this issue and others too, check out the new Easy Homebuyer’s Toolkit or refer a friend whom you know may be in the market for a house right now.
