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You need enough insurance to cover the following:
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The structure of your home.
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Your personal possessions.
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The cost of additional living expenses if your
home is damaged and you have to live elsewhere during repairs.
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Your liability to others.
 The
structure
You need enough insurance to cover the cost of rebuilding your home at
current construction costs. Don't include the cost of the land. And
don't base your rebuilding costs on the price you paid for your home.
The cost of rebuilding could be more or less than the price you paid or
could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount
of your mortgage. If the limit of your insurance policy is based on your
mortgage, make sure it's enough to cover the cost of rebuilding. (If
your mortgage is paid off, don't cancel your homeowners policy.
Homeowners insurance protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the
total square footage of your home by local building costs per square
foot. To find out construction costs in your community, call your local
real estate agent, builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
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Local construction costs
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The square footage of the structure
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The type of exterior wall construction–frame,
masonry (brick or stone) or veneer
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The style of the house (ranch, colonial)
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The number of bathrooms and other rooms
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The type of roof and materials used
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Other structures on the premises such as garages,
sheds
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Fireplaces, exterior trim and other special
features like arched windows
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Whether the house, or parts of it like the
kitchen, was custom built
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Improvement to your home–adding a second
bathroom, enlarging the kitchen or other additions that have added
value to your home
Standard homeowners policies provide coverage for
disasters such as damage due to fire, lightning, hail, explosions and
theft. They do not cover floods, earthquakes or damage caused by lack of
routine maintenance.
Flood insurance is available from the Federal Insurance Administration (
http://www.fema.gov )
and earthquake coverage is available from private insurance companies
or, in California, also through the California Earthquake Authority (
http://www.earthquakeauthority.com )
Replacement cost policies
Most policies cover replacement cost for damage to the structure. A
replacement cost policy pays for the repair or replacement of damaged
property with materials of similar kind and quality. There is no
deduction for depreciation–the decrease in value due to age, wear and
tear, and other factors.
If you purchase a flood insurance policy, coverage for the structure is
available on a replacement cost basis.
Guaranteed or extended replacement cost coverage
After a major hurricane or a tornado, building materials and
construction workers are often in great demand. This can push rebuilding
costs above homeowners policy limits, leaving you without enough money
to cover the bill. To protect against such a situation, you can buy a
policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or more
above the limits, depending on the insurance company. A guaranteed
replacement cost policy will pay whatever it costs to rebuild your home
as it was before the fire or other 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 guard
Consider adding an inflation guard clause to your policy. This
automatically adjusts the dwelling limit when you renew your policy to
reflect current construction costs in your area.
Older homes
If you own an older home, you may not be able to buy a replacement cost
policy. Instead, you may have to buy a modified replacement cost policy.
This means that instead of repairing or replacing features typical of
older homes, like plaster walls and wooden floors, with similar
materials, the policy will pay for repairs using the standard building
materials and construction techniques in use today.
Insurance companies differ greatly in how they insure older homes. Some
won't insure older homes for the replacement cost because of the expense
of re-creating special features like wall and ceiling moldings and
carvings. Other companies will insure older homes for the replacement
cost as long as the dwelling is in good condition.
If you can't insure your home for the replacement cost or choose not to
do so–in some cases, the cost of replacing a large old home is so high
that you might not want to replace it with a house of the same size–make
sure the limits of the policy are high enough to provide you with a
house of acceptable size and quality.
Your personal possessions
Most homeowners insurance policies provide coverage for your personal
possessions for approximately 50 percent to 70 percent of the amount of
insurance you have on the structure or “dwelling” of your home. The
limits of the policy typically appear on the Declarations Page
under Section I, Coverages, A. Dwelling.
To determine if this is enough coverage, you need to conduct a home
inventory. This is a detailed list of everything you own and information
related to the cost to replace these items if they were stolen or
destroyed by a disaster such as a fire (for more information see
How do I take a home inventory and why). If you think you need more
coverage, contact your agent or insurance company representative and ask
for higher limits for your personal possessions.
Replacement Cost or Actual Cash Value
You can either insure your belongings for their actual cash value,
which pays to replace your home or possessions minus a deduction for
depreciation up to the limit of your policy. Or you can opt for
replacement cost, which pays the actual cost of replacing your home
or possessions (no deduction for depreciation) up to the limit of your
policy.
Suppose, for example, a fire destroys a 10-year-old TV set in your
living room. If you have a replacement cost policy for the
contents of your home, the insurance company will pay to replace the TV
set with a new one. If you have an actual cash value policy, it
will pay only a percentage of the cost of a new TV set because the TV
has been used for 10 years and is worth a lot less than its original
cost. Some replacement cost policies also replace the item and deliver
it to you.
Generally, the price of replacement cost coverage is about 10 percent
more than that of actual cash value. If you need a flood insurance
policy for your belongings, it is only available on an actual cash value
basis.
Insuring expensive items with floaters/endorsements
There may be limits on how much coverage you get for expensive items
such as jewelry, silverware and furs. Generally, there is a limit on
jewelry for $1,000 to $2,000. You should ask your agent or look it up in
your policy. This information is in Section I, Personal Property,
Special Limits of Liability. Insurance companies may also place a
limit on what they will pay for computers.
If the limits are too low, consider buying a special personal property
floater or an endorsement. These allow you to insure these items
individually or as a collection. With floaters and endorsements, there
is no deductible. You are charged a premium based on what the item (or
collection) is, its dollar value and where you live.
You can determine the value by providing your agent with a recent
receipt or getting the item or collection appraised.
Additional
living expenses after a disaster
This is a very important feature of a standard homeowners insurance
policy. This pays the additional costs of temporarily living away from
your home if you can't live in it due to a fire, severe storm or other
insured disaster. It covers hotel bills, restaurant meals and other
living expenses incurred while your home is being rebuilt.
Coverage for additional living expenses differs from company to company.
Many policies provide coverage for about 20% of the insurance on your
house. Some companies will even sell you a policy that provides you with
an unlimited amount of loss of use coverage, for a limited amount of
time.
If you rent out part of your house, this coverage also reimburses you
for the rent that you would have collected from your tenant if your home
had not been destroyed.
You should talk to your agent or company to make sure you know exactly
how much coverage you have and how long the coverage will be in effect.
In most cases, you can increase this coverage for an additional premium.
Liability to
others
This part of your policy covers you against lawsuits for bodily injury
or property damage that you or family members cause to other people. It
also pays for damage caused by pets. It pays for both the cost of
defending you in court and for any damages a court rules you must pay.
Generally, most homeowners insurance policies provide a minimum of
$100,000 worth of liability insurance, but higher amounts are available.
Increasingly, it is recommended that homeowners consider purchasing at
least $300,000 to $500,000 worth of coverage of liability protection.
Umbrella or Excess Liability.
You should buy enough liability insurance to protect your assets. If you
own property and or have investments and savings that are worth more
than the liability limits in your policy, you may consider purchasing an
excess liability or umbrella policy.
Umbrella or excess liability policies provide extra coverage. They start
to pay after you have used up the liability insurance in your underlying
home (or auto) policy. An umbrella policy is not part of your homeowners
policy. You have to purchase it separately. In addition to providing a
higher dollar amount, they offer broader coverage. You are covered for
libel, slander, and invasion of privacy. These things are not covered
under standard homeowners or auto policies.
The cost of an umbrella policy depends on how much underlying insurance
you have and the kind of risk you represent. The greater the underlying
liability coverage, the cheaper the policy. This is because you would be
the less likely to need the additional insurance. Most companies will
require a minimum of $300,000 on your home and your car, if you own one.
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