If your home is damaged or destroyed you want to make sure that you are carrying enough insurance to rebuild your home, replace all of your possessions and be able to afford to live somewhere else while your house is being fixed.
Homeowners insurance will help with all of these costs but you need to make sure you have the proper amount of coverage in place. Determining the correct amount of insurance for your particular situation can be tricky so we have put together a few guidelines below to help you calculate just how much insurance you need.
How Much Dwelling Coverage do You Need?
When it comes to homeowners insurance you want to carry enough coverage to rebuild your home in today’s market. The cost to rebuild your home is not the same as what you paid for it or its current market value. The current market value of your home includes the land that it sits on, an expense that your insurance policy doesn’t need to cover.
Your insurance agent will provide a recommendation when it comes to coverage levels but it is a good idea to understand how they came up with their number as well as verify that you feel it provides enough coverage.
Here are the various factors you should consider when calculating the amount of homeowners insurance you need:
Factors that Impact Rebuilding Costs
These are some of the major factors that should be considered:
- Construction costs in your local market
- Square footage of your home
- The type of exterior walls your home has: frame, masonry or veneer
- Style of the home: ranch or two story
- The number of bedrooms and bathrooms
- Roofing materials
- Additional buildings on the property
- Special or custom features
If you are looking for a quick calculation of the amount of insurance you need, simply multiple the total square footage of your home by local building costs.
You can determine local building costs by contacting a local homebuilder, appraiser, local builders association or insurance agent who should be able to give you a fairly accurate per square foot estimate of building costs. There are also numerous websites that can help you determine your local building costs.
While multiplying your local building costs by square footage will give you a pretty good estimate, if your home was custom built or features expensive add-ons, these will all have to be factored into your rebuilding costs. Recent improvements, upgrades or additions will also have to be calculated.
While the size of your home and the materials it is built out of are the major factors that impact the cost to rebuild, there are additional factors that should be considered:
Is Your Home up to Code?
Building codes change over time and if your home is older it may not meet current building codes. If your house is damaged you will most likely be required to rebuild it to the current codes which can dramatically increase the cost to rebuild. Unfortunately, most standard homeowner policies will not cover this additional expense.
If you are concerned that your home is not up to current code you should consider adding an endorsement to your policy that covers the additional costs of bringing your house up to code. This type of rider is very affordable and can save you thousands if your home is damaged or destroyed.
If you have an outbuilding, shed, or barn on your property you should factor the cost to replace it into the amount of homeowners insurance you need to carry. These buildings are covered under most homeowner policies at 10 percent of the total insurance you are carrying on your home.
As an example, if you are carrying $300,000 in coverage on your home, your policy will pay out up to $30,000 to rebuild your outbuildings. If this is not enough to cover the additional structures on your property you may need to up your coverage levels or purchase a standalone policy that covers only the additional structures on your property.
While multiplying the square footage by the local rebuilding costs will give you a fairly accurate estimate with newer homes, it doesn’t work as well on older, more ornate houses.
If your home is filled with ornate crown molding, hand carved railings, stained glass windows, plaster walls or other expensive to replicate items you may need to up your coverage levels or buy an additional rider.
Many insurance companies will only cover repairs using current building materials, which means your plaster walls may be rebuilt with drywall. Older homes can be difficult to insure and you should talk with your agent about your options if you want you home rebuilt exactly as it was before it was damaged or destroyed.
Increased Building Costs
Building costs can increase over time and if you don’t review your policy limits on a regular basis you may find you are underinsured when disaster strikes. Inflation guards can be added to your policy, which automatically adjusts your dwelling limits based on current construction costs.
Building costs can increase dramatically after a major catastrophic event such as a hurricane or tornado as increased demand for materials and construction workers pushes prices up. A guaranteed replacement cost policy will cover these additional costs automatically while a standard homeowners policy will only cover your rebuilding costs up to policy limits, leaving you on the hook for some of the additional costs to rebuild.
A homeowners policy not only protects your dwelling and outbuildings, it also covers your possessions and it is important to make sure you have enough coverage to replace all of your possessions if they are damaged or destroyed.
Coverage levels vary, but most homeowners policies cover your possessions at 50 to 75 percent of your dwelling coverage. As an example, if you are carrying $300,000 in coverage on your home and your possessions are covered at 50 percent you have $150,000 to replace your possessions.
In order to make sure you are properly covered you should do a home inventory to determine if your possessions are fully covered. Having a complete inventory will also help if you need to make a claim.
There are numerous apps that can help you inventory your possessions. Be sure to keep a copy of your inventory off-site or in the cloud so it is not destroyed if your home suffers a catastrophic event.
High Value Items
The majority of standard homeowner policies have limits on high value items such as jewelry, collectibles, firearms and furs to name just a few. While coverage levels vary, they are usually capped at $1,500 to $2,000.
If you have high value items that exceed this coverage cap you may need to purchase a rider that ups the coverage levels for these specific items.
Additional Living Expenses
Most standard homeowner policies include some additional living expenses (ALE) coverage. This insurance will help cover bills that arise if you are unable to live in your home due to damage from a covered peril. As an example, if your roof was destroyed by a tornado you may not be able to stay in your home until it is replaced.
ALE coverage will help pay hotel, restaurant bills as well as other living costs while you are out of your home. Coverage levels vary but most policies provide ALE coverage at 20 percent of the total coverage you carry on your home. If you feel this is not enough you can up your total coverage to increase your ALE protection.
This is a very important party of your homeowners policy and can be a financial lifesaver if someone is injured at your home. Liability coverage protects you against bodily injury claims and property damage that you or family members cause to others.
Examples include someone slipping or falling at your home, a pet bite or even sending a baseball through a neighbors window.
Medical costs can quickly spiral out of control if someone is injured on your property. Liability insurance covers medical bills as well as the cost of a lawsuit if you are sued.
The majority of standard homeowner policies offer $100,000 in liability protection but most experts recommend upping those limits to at least $300,000. If you have assets worth more than your liability coverage limits you may want to consider an umbrella policy.
Umbrella policies step in when your liability coverage limits on your homeowner policy are met. Umbrella policies are usually sold in increments of $1 million and are very affordable.