April 14th, 2014
Your home is likely your most valuable asset. In the case of a natural disaster, theft or fire, you don't want to find out that you didn't have enough coverage to rebuild your home. Nationwide found that more than two-thirds of homes are underinsured. The average home in the U.S. is underinsured 22 percent, although some homeowners have a gap as wide as 60 percent between their coverage and rebuilding costs.
Being underinsured is risky, as it could leave you with thousands of dollars in out-of-pocket expenses to rebuild after your home is damaged or destroyed. There are a number of reasons homeowners don't have enough insurance, but many may simply be unaware of the true construction costs to rebuild.
Types of coverage
According to the Insurance Information Institute, a standard homeowners insurance policy usually encompasses four areas of coverage: structure of the home, personal belongings, liability protection and additional living expenses in the event you need to live away from your home while it is being repaired.
There are two different types of coverage for homeowners insurance: actual cost value and replacement cost. Actual cost value policies are typically cheaper than replacement cost coverage and essentially insures the house as-is. That means that you might not be able to receive enough to cover the costs of replacing everything you own if it is lost or damaged. Replacement cost coverage may cost more, but will cover the expenses to replace your belongings and rebuild your home.
Understanding coverage terms
There are some coverage phrases that may suggest that you are fully protected, such as "guaranteed replacement." However, these clauses do not necessarily mean that you are 100 percent covered for replacement or rebuilding. In fact, some of these companies will cap their replacement benefits at 100 percent or 150 percent of the insured amount of the home.
You should be aware that homeowners insurance policies typically do not include flood coverage. Most homeowners are advised to invest in this coverage, as floods can cause major damage even to properties that are not in areas prone to flooding.
Whenever you increase the value of your home with an addition or renovation, you will need to update your homeowners insurance policy, as your replacement costs will have gone up. This is also true when you purchase new appliances, install green updates or acquire valuable belongings inside your home.
Ensuring your insurance coverage is adequate
To determine whether you have enough coverage, you can use web tools to estimate the replacement costs of rebuilding your home and replacing all your belongings, then compare this figure to how much coverage you are truly guaranteed with your policy. You can also enlist the help of an appraiser to get a more accurate estimate. If you find you are underinsured, talk to your insurance company to adjust your policy or search for additional coverage options. You should also consider opting for replacement cost coverage if you currently have a policy with actual cost value coverage.