How much homeowners insurance do you need? The short answer is that you need to cover the expense of rebuilding your house at the present day construction cost. The price shouldn't include the cost of your land or the price you paid for your home. That overall price could be more or less than the price you paid for your home.
Most banks will require that you buy enough insurance to cover the amount of your mortgage. That total, however, may not cover the cost of rebuilding, so make sure it can cover that. If your mortgage is paid off, don't cancel your policy, as the insurance protects your investment. This article won't tell you how to pick an insurer, just how much you'll need. For more about picking a company, read this nice write-up by my colleague.
To get a good ballpark figure of the cost of rebuilding, find out the construction costs in your community by square footage. A real estate agent, insurance agent or builders association should be resourceful in getting you this number. Multiply that rate by the total square footage of your home, and eureka...that wasn't so hard was it?
{dybanners}12{/dybanners}
That will give you a good idea, but it doesn't get into specifics. According to the Insurance Information Institute (www.iii.org), there are plenty of other considerations that will affect this figure.
Factors that will determine the cost of rebuilding your home:
• The type of exterior wall construction (frame, masonry or veneer)
• The house style (ranch, colonial)
• The number of bathrooms and other rooms
• The type of roof
• Garages, sheds and other structures
• Fireplaces, exterior trim, molding or other features like arched windows
• Whether the house, or parts of it like the kitchen, was custom built
• Improvement to your home (adding a second bathroom, enlarging the kitchen or other improvements that have added home value
It's important to remember that standard homeowners policies do not cover floods, earthquakes or damage caused by lack of routine maintenance.
Flood insurance is available from the National Flood Insurance Program, and from some private insurers. Earthquake coverage is available separately or, in California, also through the California Earthquake Authority.
Replacement costs
A standard policy will cover replacement costs for structural damage. That will cover putting things back with similar materials and construction, but there is no deduction for depreciation due to wear or age. Flood insurance, should you chose to buy it also covers straight replacement.
Look out
If a major disaster hits your area, it can push up the costs of both materials and labor, due to greater demand, and this can leave you without the funds to make the needed repairs. To account for this, you can get an "extended replacement cost" policy, that will pay an extra 20 or more percent above your limit. A more expensive "guaranteed replacement policy" pays whatever the cost is after a major disaster.
Building codes
Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won't pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)
Inflation
You can also add an inflation guard clause to your homeowners policy. This will automatically adjust to current construction costs in your region. If you opt not to get this, be sure to revisit your coverage and be prepared to make regular visits to your agent!
Older houses
Older homes may not be eligible for a replacement cost policy, and you'll have to get a modified replacement cost policy. That means that instead of trying to fix features common in older homes, rebuilding will use standard materials and construction techniques. It pays to shop. Some companies don't want to be on the hook for special wall and ceiling moldings and fancy things common in old homes, while others will be willing if the home is in good shape.
Just be sure that if you can't (or won't) pay the premium to replace a large older home with one of like size that the policy limits at least cover a home that's of the size and quality you can live with.
Personal Possessions
Most homeowners policies provide coverage for personal possessions at a cost of 50 percent to 70 percent of the amount of insurance you have on the structure of the home. That may or may not be enough. The only you can know for sure, is to do a home inventory. If you feel that the coverage isn't sufficient, you'll need to call you agent and have him upgrade the policy.
Depreciation (Or Not)
You have the choice of choosing whether or not to replace your belongings at the their actual cash value MINUS DEPRECIATION, or you can opt for a total replacement cost, which will replace the items outright, regardless of the age of the item. The outright price of replacement is typically ten percent more than retail price.
For example, if you have a five year old computer that's lost in a fire, you won't get much to replace it due to depreciation. Electronic items like computers and TV's depreciate fast due to progress in technology. However, if you opt for total replacement cost, you'd get a brand new computer.
Floaters
Insurance companies have limited resources, so if you have a collection of rare things, like a stamp collection or jewelry or something like this, you won't likely get the full value in replacement due to a cap that companies place to keep policy prices affordable ($1000 to $2000 typically). You can read more about this in our article about insuring luxury items.
Umbrella Policies
Insurance needs to be sufficient to cover your assets. If you own property or own investments in excess of the liability limits of your policy, you may need to purchase a seperate umbrella policy. An umbrella, or "excess liability" policy give you extra coverage. These policies kick in after you've used up the limits of your home or auto policies. So as you can understand, these aren't part of your homeowners policy. They are a completely different animal and work their own way. Not only do they cover a broader monetary amount that your regular policies, they also can cover you from libel, slander and invasion of privacy, the sort of things not covered by your normal homeowner or auto policy.
Since umbrella policies are sort of a second line of defense, the prices are based on the total coverage of your existing insurance. The more robust your home and car are covered, the less likely you'll need your umbrella policy, so it gets cheaper.
