How much homeowners insurance should you consider?
What is homeowners insurance?
Homeowners insurance is a type of property insurance. It can help cover the damage or loss of your home or personal property following a natural disaster, theft, or vandalism. Homeowners insurance is available for all types of homes—from single family homes to townhouses, condominiums, and apartments.
If you experience a covered loss (for example, a home fire or a theft from your shed), then you will file a claim with your homeowners insurance company. If your claim meets the requirements outlined in your policy, the insurance company will pay to repair or replace the lost or damaged items.
As you consider which homeowners insurance policy could best fit your needs, you may want to learn more about the different coverage options.
Covered perils
A typical homeowners insurance policy provides coverage for damage to property caused by fire, smoke, lightning, windstorms, hail, theft, vandalism, and other incidents. Most policies refer to these events as covered perils. All of the events that are covered will be spelled out in your individual policy.
Keep in mind that standard policies do not cover damages as a result of floods or earthquakes. If you live in an area that is at high risk for floods or earthquakes, you may want to consider separate policies to cover those dangers.
How much homeowners insurance should you consider?
To determine how much homeowners insurance to buy, you may want to review the value of your home and your personal property, as well as the current cost to rebuild your home and replace your property. You may want to get a policy that has a limit high enough to cover the cost of rebuilding your home.
In many cases, the price you paid for your home, or even the price it would sell for in the current market, is lower than what it might cost to rebuild. For homeowners insurance policies that are required as part of a mortgage, your policy limit may be based on what you owe on your mortgage and may not be enough to cover rebuilding your home if it is a total loss.
What could happen without coverage?
Homeowners without coverage could run into problems with mortgage lenders. This could lead foreclosure on your mortgage and potentially result in the loss of the home. If your home is paid off, but you fail to carry homeowners insurance, the responsibility for the cost of repairs or replacement could rest entirely on your shoulders.
Additionally, access to homeowners insurance might present a challenge for some. It could be due to geographic location or the homeowner’s credit score. Still modified coverage options may be accessible. Working with the lender or reaching out to your state insurance department are steps you can take as you work toward gaining coverage for your investment.
Calculating rebuilding costs
Beyond the cost of living in your area, there are many factors that can impact rebuilding costs. When you are thinking about how much it would cost to rebuild your home, consider the following expenses:
- Exterior materials, including siding and roofing materials
- Style and aesthetic design
- Size, whether the home is one or two stories
- Number of windows and doors
- Garages, sheds, or outbuildings
- Labor costs
- Temporary housing while your home is being repaired
- Protecting personal property
In addition to your physical home, homeowners insurance is designed to cover your personal property both inside and outside of your home. Personal property may include the furniture, appliances, and clothing in your home, as well as the items outside of your home including lawn equipment and tools.
Policies typically include a standard level of coverage to replace damaged or stolen property. Many homeowners may opt to buy extra coverage for items that are particularly valuable including antiques and jewelry.
To determine the value of your personal property, you may want to conduct an inventory. This can be done by documenting every item in each room of your home, as well as all the items in your garage or shed. You may want to do this using a digital spreadsheet that can be safely saved and easily accessed in an emergency. Some homeowners choose to take videos or pictures of their possessions in their homes. With either method, you will want to make sure to include the estimated value of big-ticket items. This may make it easier to determine the amount of your claim following a theft or disaster.
Understanding liability coverage
Homeowners insurance policies frequently include liability coverage. Liability coverage pays for damages caused by your negligence. For instance, if someone gets injured and it is determined to be your fault, your liability coverage may cover their medical costs. Beyond covering medical costs, liability protection may also cover legal fees for lawsuits brought against you.
Homeowners insurance policies will specify the amount of liability coverage included. You could consider additional liability coverage if the amount included with your homeowners insurance policy is not enough. How much liability coverage you may want depends on the amount of assets you have to protect.
Making a claim
After you have experienced a covered peril, your insurance company will determine the amount of your reimbursement for stolen or damaged property.
There are two standard methods for determining reimbursements. The first is called replacement cost. Using this method, the insurance company pays you the cost of replacing your property. This means you will receive a payment that reflects the current market value to replace what was lost up to a maximum dollar amount.
The second method is called actual cash value. This means that the insurance company will pay you what your stolen or damaged property was actually worth. This method considers property depreciation and pays actual value instead of replacement value. In other words, it covers what your property was worth at the time of the loss, which might be less than it will cost to buy/build again new.
Keep in mind that before an insurance company reimburses you for a loss, you may need to meet your deductible, which is the amount you pay out-of-pocket toward the cost. Your policy will state how much your deductible is.
How much will homeowners insurance cost?
Homeowners insurance policies are written individually, typically at the time you purchase or take out a mortgage on a home. The cost depends on the amount of your coverage and how high your deductibles are.
It's important to periodically review your homeowners coverage to make sure that it will cover any major purchases or additions to your home. For convenience, you may want to add an inflation-guard endorsement to your policy, which instructs the insurance company to automatically raise your policy limit at each policy renewal, according to a predetermined index of local home values. Be aware that this will also likely raise your premiums.
Since premiums for similar policies vary from company to company, you may want to shop around and compare rates. Insurance companies sometimes give discounts, too. Ask about a discount if your home has smoke alarms or a security system or is less than 15 years old. Discounts may also be available if all the occupants of your home are non-smokers. Finally, you could consider selecting the same insurance company for your homeowners and auto insurance or other coverage, as many companies offer multiple-policy discounts.
A homeowners insurance policy can help protect your home and all of your personal property. Protecting these items may provide you with essential security in the event of an unexpected loss. Learn more about costs and coverage options.
