Insurance is a ubiquitous part of American life, but that doesn’t mean it’s always easy to navigate. Unfortunately, with the range of matters we need to deal with on a day-to-day basis, mistakes we have made with our insurance can slip through the cracks. This is one reason that many homeowners are either over- or under-insured.
You may have decided to set things straight with your homeowners insurance. The good news is that it’s easy to get online homeowners insurance quotes. However, you need to know exactly how much insurance you actually need before trying to organize your new premiums.
To determine whether you are over- or under-insured, you need to decide how much homeowners insurance you need.
What types of coverage do I need?
Your homeowners insurance covers a number of things, each of which will require specific levels of cover. These are the types of coverage you need and how much you need of each.
Liability Cover
We’ll start with liability cover because that is what laws in most states require at minimum. Liability cover will pay out if you cause a third party accidental bodily injury or damage to their property. It covers you if they get hurt while on your premises as well. It also covers family members and pets that live on your property.
The minimum liability cover provided by most insurance policies is worth $100,000, but it is recommended that you purchase at least $300,000 to $500,000 worth of coverage.
Structural Cover
But most people are not thinking of liability cover when purchasing a homeowners insurance policy. The main consideration is, of course, coverage for the home itself in case of a disaster. Determining how much coverage you need is a little more complicated than you might think.
The problem is that you cannot simply cover the amount you paid for your home. Market value has little to do with the actual cost of the structure and, depending on when you bought your home, this value may provide too much or too little coverage.
What you need to determine is how much rebuilding will cost, and there is never an easy answer. You have little choice but to calculate how much rebuilding costs at current prices, even if they are inflated at present. In post-COVID times, construction is still more expensive than ever, due to supply chain issues and inflation. Your insurance will need to cover these high expenses.
But what happens if prices inflate further and your insurance coverage is not enough when something happens? For this, you should get a guaranteed replacement cost policy, which will pay whatever it costs to rebuild your home. An extended replacement cost policy will pay an extra 20% above the limits when necessary.
Contents Cover
Your homeowners insurance includes all of your possessions as well, and as such you need to determine what your things cost. This requires you to do a full inventory of everything you own. When you do an inventory now, you may find that the cost of your possessions far exceeds what is covered. This may be due to a combination of inflation, purchases you have subsequently made, and an underestimate at the time.
Items that are particularly expensive – generally those that exceed around $2,000 each – may need to be added as extras to your insurance policy. So, if you don’t have coverage for your jewelry and antiques, you cannot just rely on your regular contents cover.
Additional Living Expenses (ALE) Cover
Additional Living Expenses (ALE) refers to costs that you incur when you have to organize alternative accommodation after something happens to your home. You may have to live somewhere else while you do construction on your home. To determine exactly how much you would need is extremely difficult, as this would depend on a number of variables. However, most policies provide ALE cover for approximately 20% of the insurance on your home.
The above types of cover will help you determine if you are over- or under-insured. You should do assessments every so often in order to account for changes to your lifestyle as well as major shifts in economics.