Determining How Much Insurance You Really Need

When it comes to homeowners’ insurance, many people today are either overinsured or underinsured and unaware of it. When evaluating your policy, it is important to do research and understand what amount you should purchase.  

As a homeowner, you should consider several factors when purchasing homeowners’ insurance. If you already own a policy, start by reviewing its terms. Your needs may have changed since you bought or last reviewed the policy. This will also help you understand the various types of coverage available, as well as get a better grasp on your needs.

If you have actual cash value coverage, your policy provides only the depreciated value of your home. That means when you draw from the policy, you will receive the value of the current condition of your home. In other words, you would receive only the depreciated value of the home’s windows, appliances and other assets.

Another option is comprehensive replacement coverage. This policy comes highly recommended from insurance agents and companies. With this, your policy will reimburse you for the total cost of rebuilding your home, factoring in construction, inflation and other costs. It accounts for costs that a cash value policy does not.

However, even with replacement coverage, you still need to ensure you have enough coverage for all of the valuables and aspects of your home. Despite what your home might sell for today, it may cost more to rebuild once you factor in construction costs. However, don’t overinsure by adding the value of the land to the policy. While your house may suffer damage, the land should be in good enough shape to rebuild.

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4 comments

  1. ” With this, your policy will reimburse you for the total cost of rebuilding your home, factoring in construction, inflation and other costs ”
    The above quote is directly from the post and while it’s nice to be brief, I might find this statement a bit too general. The real key to the value to be insured is based upon (and claims will be based upon) the value to replace your home ( less excluded items such as foundations, site work, etc). The most widely used homeowners insurance contracts contain a co-insurance clause. That clause protects the insured and the insurer. A capable insurance agent has tools available (Marshall Swift, etc) that they can use to estimate the replacement cost of the structure(s). Homeowners insurance has nothing to do with market value or sale price. Suggestion, ask your insurance agent to give you a copy of how he estimated your replacement cost.

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