The loss of a home in a large-scale disaster or catastrophic event brings its own kind of trauma and heartbreak. The place you’ve spent years in, poured time and effort into maintaining, where you and your family feel safe and secure, suddenly, is gone.
Assessing the damage in the wake of such an incident is a difficult, emotionally draining process. When there are problems with home insurance, things become so much worse.
Do You Have Enough Homeowners Coverage?
If your home did not have enough homeowners coverage to rebuild or repair the damage incurred, the financial hardship will compound your problems.
Unfortunately, it’s fairly common for people to end up with a house made unlivable by a catastrophic event, like a hurricane or wildfire, and not enough insurance coverage to make it sound again. You should take action immediately to make sure this type of situation doesn’t happen to you.
How Much Home Insurance Do You Really Need?
The first step in heading off such a heartbreaking scenario, in which you’re unable to repair or rebuild your home, is to ask yourself directly:
How much homeowners insurance do I need?
The exact number will depend on multiple factors, such as the value of the structure and all possessions within it, as well as the house’s location and the relative risk of disasters striking that region.
It’s highly likely you already have some home insurance (after all, the Consumer Financial Protection Bureau notes that most home loans require you to obtain coverage) but the amount may not be sufficient for your needs, meaning it’s time to do some calculations.
Due to these complicating factors, as well as the potential need for additional coverage types that don’t appear on standard homeowners policies, the correct amount of insurance for your home will vary considerably from others’ numbers, even your closest neighbors. No matter where you are, however, you should consider your insurance preparedness right away.
Homeowners Insurance Coverage Calculations
It’s important to make these calculations in advance of a disaster striking. By the time trouble comes, it will be too late to make a difference.
Calculate the Cost of Rebuilding Your Home
The most basic purpose of a homeowners insurance policy is to give property owners the funds to repair or rebuild a house in the event of damage. Determining the cost for a full rebuild is an important first step in choosing the overall value of a policy. The Insurance Information Institute noted that the rebuild cost does not equal the expense to buy it, or the cost it would currently recoup on the market, also noting that policies limited by mortgage amounts may not be able to completely cover rebuilding.
If the sticker price of the home is not the same as the rebuild cost, how do you calculate the cost to rebuild a home?
The III has suggestions: For example, a quick way to estimate home value is to multiply the size of the house, in square feet, by the cost charged by local builders. It’s important that these contractors are based in your area, as costs vary widely.
Beyond the basic rebuild cost, your actual expenses may increase or decrease depending on factors such as the age of the house, any potential building code changes that have come into effect since it was built, whether the structure has custom features, and if there are any other structures on the property, such as free-standing sheds or garages.
Investigate Additional Coverage
One of the easiest mistakes to make when it comes to buying homeowners insurance is making assumptions about what is covered by a policy. If you’re at risk of suffering water damage due to a flood or stuctural damage from an earthquake, you may be shocked to realize standard policies don’t pay out in the event of either disaster. The III noted flood insurance is required in designated zones by the coast or the banks of major rivers, but that such coverage can be relevant in other areas, too. Events such as snowmelt in the spring may bring floods inland, leading to disasters that aren’t included in home policies.
Determining the relative need for flood and earthquake coverage is just one of many considerations that go into calculating ideal insurance policies. For instance, a basic policy may not cover the complete replacement value of goods in your house. Ending up without enough funds to compensate for the loss of prized possessions could be a bitter outcome in the wake of a disaster.
Investopedia explained that scheduled personal property coverage exists to fill this functional gap, as a type of add-on coverage for homeowners policies. These policies are based on appraisals of the value of your highest-value items, which may include jewelry, watches, firearms, musical equipment, and more. In cases where the maximum pay-outs for property in your home policy don’t match the value of the items in your home, such coverage may be the way to bridge the gap.
Do the Math on Temporary Living
Surprising and unforeseen costs tend to pile up in the wake of a disaster. If your home is unlivable for an extended period of time, you may find yourself paying for:
These costs don’t have to come out of pocket, though you’ll likely have to take out additional insurance coverage to be reimbursed. This is called additional living expense coverage.
Living expense coverage is designed to help you maintain your standard of living when your home is impossible to occupy. As The Balance pointed out, the upward limits on this coverage are typically set at around 30% of the dwelling limit you have negotiated in your homeowners policy, while the III put the figure at 20%. The exact percentage and amount an insurer will cover differs between providers.
Since living expense insurance is related to maintaining your standard of life, you should keep documentation about how much you normally spend. This way, if you’re inconvenienced by a disaster, you can show clearly how much extra you’re spending to maintain your life and make it more likely to get reimbursement.
Estimate Your Liability Insurance Needs
A homeowners claim may come from circumstances that have nothing to do with structural damage or property loss. It’s important that you also consider these scenarios when determining how large a policy to take out. The III noted that liability insurance, which is based on paying damages to people who are hurt on your property, is an essential part of a policy in addition to structural and property coverage. While the standard amount of liability coverage in a policy is set at a minimum of $100,000, the III recommended considering more value, up to $300,000, $500,000, or more.
When purchasing coverage above the liability limit on a standard policy, you can buy what is known as umbrella liability or excess liability. If you have a large amount of liability coverage included in your homeowners policy, it will likely be relatively affordable to add more. You should consider adding this extra coverage if the value of your property and investment is greater than the upper liability limit on your basic policy.
Finding the Best Homeowners Coverage
When it’s time to purchase a new homeowners policy or negotiate changes to your current coverage, you can and should consider the formulas above in determining whether you have enough insurance to meet your needs. Envisioning worst-case scenarios may guide your thinking and help you find the right amount.
If the most devastating possible disaster struck your house, could you rebuild? Would your personal belongings be covered? Would you be able to stay in temporary housing and afford to keep up with meals, laundry, pet care, and more? Might a liability claim for a high value prove devastating to your personal finances?
Homeowners insurance is typically required if you have a mortgage, but it’s more than just an automatic addition to your expenses. At its best, this coverage provides peace of mind and helps you keep your life together in the wake of disastrous events. You can and should see what the top home insurance providers offer in terms of standard policies in your area, extra coverage options, discounts, and special offers. Doing this research, coupled with understanding your own needs, will equip you against devastating losses when damaging incidents occur.*While we make every effort to keep our site updated, please be aware that "timely" information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.