Is Your Home Insurance Adequate?

Many homeowners have completed home improvement projects during the pandemic, either by necessity or because they finally had the time. And in the process of completing their project have discovered that construction costs have soared.

The increase in construction costs are a blend of inflation and supply-chain challenges that we read about daily in our newspapers. As a result, your home’s replacement costs have likely increased, so now is probably a good time to review your homeowner’s policy to ensure your limits and coverages are adequate.

This article is a homeowners’ insurance guide and an overview of the primary types of insurance available, along with some of the more common options that should be considered when purchasing coverage, which for most families, is their single largest asset.

Homeowners insurance (also known as home insurance) isn't a luxury; it's a necessity-And not just because it protects your home and possessions against damage or theft. Virtually all mortgage companies require borrowers to have insurance coverage for the full or fair value of a property (usually the purchase price), and they won't make a loan or finance a residential real estate transaction without proof of it.

What a Homeowner's Policy Provides

Although they are infinitely customizable, a homeowner's insurance policy has certain standard elements that provide what risks the insurer will cover.

Damage to the Interior or Exterior of Your House

In the event of damage due to fire, hurricanes, lightning, vandalism or other covered disasters, your insurer will compensate you so your house can be repaired or even completely rebuilt. Destruction or mutilation from floods and earthquakes is generally not covered and you may require separate riders if you want that type of protection. Freestanding garages, sheds or other structures on the property may need to be covered separately using the same guidelines as for the main house.

Clothing, furniture, appliances, and most of the other contents in your home are covered if they're destroyed in an insured disaster. You can even get "off-premises" coverage; so, you could file a claim for lost jewelry, say, no matter where in the world you lost it. However, there may be a limit on the amount your insurer will reimburse you. According to the Insurance Information Institute, most insurance companies will provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. For example, if your house is insured for $200,000, there would be up to about $140,000 worth of coverage for your possessions.

If you own a lot of high-priced possessions (fine art or antiques, fine jewelry, designer clothes), you might want to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even buy a separate policy.

Personal Liability for Damage or Injuries

Liability coverage protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, Jenna, your insurer will pay her medical expenses, no matter if the bite occurs at your place or hers. Or, if your kid breaks her Ming vase, you can file a claim to reimburse her. And if Jenna slips on the broken vase pieces and successfully sues for pain and suffering or for lost wages, you'll be covered for that too-just as if someone had been injured on your property. Off-premises liability coverage often doesn't apply for those with renter's insurance.

While policies can offer as little as $100,000 of liability coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy.

Hotel or House Rental While Your Home Is Being Rebuilt or Repaired

It's unlikely, but if you do find yourself forced out of your home for a time, additional living expense coverage will undoubtedly be the best coverage you ever purchased. This coverage would reimburse you for the rent, hotel room, restaurant meals, and other incidental costs you incur while waiting for your home to become habitable again. But before you book a suite at the Ritz-Carlton and order caviar from room service, keep in mind that policies impose strict daily and total limits. Of course, you can expand those daily limits if you're willing to pay more in coverage.

Different Types of Homeowners Coverage

There are essentially three levels of coverage.

Actual cash value covers the cost of the house plus the value of your belongings after deducting depreciation (i.e., how much the items are currently worth, not how much you paid for them).

Replacement value policies cover the actual cash value of your home and possessions without the deduction for depreciation. So, you would be able to repair or rebuild your home up to the original value.

Guaranteed (or extended) replacement cost/value:

This inflation-buffer policy is the most comprehensive and pays for whatever it costs to repair or rebuild your home—even if it's more than your policy limit. Certain insurers offer an extended replacement, meaning it offers more coverage than you purchased. However, there is a ceiling that is 20% to 25% higher than the policy limit.

Some advisors feel all homeowners should buy guaranteed replacement value policies because having just enough insurance to cover the value of your home isn’t sufficient. These advisors suggest you need enough insurance to rebuild your home, preferably at current prices (which probably will have risen since you initially purchased or built). Often, homeowners make the mistake of insuring a house just enough to cover the mortgage, but that usually equates to much less than your homes actual value. Home values tend to fluctuate and therefore, it's a good idea to get coverage for more than your home is worth. Guaranteed replacement value policies will absorb the increased replacement costs and provide the homeowner with a cushion if construction prices increase.

What Isn't Covered by Homeowners Insurance?

While homeowner's insurance covers most scenarios where a loss could occur, some events are typically excluded from policies, such as natural disasters or other "acts of God," and acts of war.

What if you live in a flood or hurricane area? Or an area with a history of earthquakes? You'll want riders for these or an extra policy for earthquake insurance or flood insurance. There’s also sewer and drain backup coverage you can add on, and even identity recovery coverage that reimburses you for expenses related to being a victim of identity theft.

Talk to a professional

The best way to get quotes for insurance policies is to go directly to the insurance companies or speak to an independent agent who deals with multiple companies-as opposed to a traditional “captive" insurance agent or financial planner who works for just one home insurance company. Bear in mind, though, a broker licensed to sell for multiple companies often attaches their own fees to policies and policy renewals.

It’s often wise to get quotes from several sources because what you’re really looking for is somebody that is truly looking out for your best interests. That means asking a lot of questions and getting them answered so that you’re comfortable that your family and home are properly protected.