It seems like such a simple decision, but it can be one fraught with complications: what level of coverage do you need when shopping for homeowner’s insurance? The simple answer is that you need to be covered so you could replace your house and all of your belongings in case they were destroyed in some sort of disaster. Unfortunately, the simple answer isn’t as simple as it sounds. Here are a few things to consider when purchasing a homeowner’s insurance policy.
The first thing that likely comes to mind when thinking about what needs to be covered by your home insurance is your home itself. This isn’t as easy as it sounds because you can’t just consider your home’s appraisal value. The cost you paid for your house or the amount you know it appraises for will include the value of the land on which your home sits. Even if your house is destroyed in a fire, your land won’t be, so you need to figure out a way to get the value of your home on its own. The best way to do this is to ask a contractor to estimate how much it would cost to rebuild your home exactly as it is now keeping in mind the cost of materials and labor. Since these costs will change with the market, it’s a good idea to repeat this process yearly to make sure your insurance coverage is always up to date.
Once you have the worth of the structural portion of your home figured out, you will want to move on to everything you have in your home. Create a home inventory by making a comprehensive list of everything of any value that you have in your house. Going room by room, categorize everything and figure out how much each item would cost to replace. You should also take pictures or video of everything in your house during this process and store them somewhere offsite such as in a safety deposit box at you bank or virtually in the cloud. This way, if you do experience a loss and need access to your home inventory, it won’t have been destroyed with your house. Remember that your homeowner’s insurance policy will likely place a cap on "dwelling coverage," so make sure that you have a comprehensive enough plan to replace your belongings should it become necessary. Also remember that expensive items like jewelry and art are often have lower liability limits on general policies. If you have large, expensive collections that you want to have protected, bring that up specifically with your insurance agent.
Now that you have a number in mind for how much it would cost to replace your house and everything in it, it’s time to start considering a specific policy. You will likely need to choose between an "actual cash value" policy and a "replacement cost" policy. If you choose a cash value policy, you will be reimbursed for the cost of your home and your possessions at their current market rate with depreciation. This means that if your house burns down but was already in need of some serious repairs, you will get significantly less reimbursement. A replacement cost policy is generally more expensive but guarantees you the amount it would cost to rebuild your home using the same materials it was constructed. It will also pay to replace any of your destroyed items as though they were new.
It is also important to find out the exact limitations of your policy when you are buying homeowner’s insurance. Remember that certain natural disasters like floods, earthquakes, tornadoes, and hurricanes may not be covered by all policies. If you live in a high-risk area for a certain type of natural disaster, you need to be sure you have coverage either through your general home insurance policy or through a separate policy you get just for floods, earthquakes, etc. Once you are able to determine exactly what levels of coverage you need for your homeowner’s insurance, you will likely find the process of shopping for the right policy becomes much easier.
