First, take a step back and make sure you’re insuring the home for the cost to rebuild it — not the market value. The amount should be based on construction costs to replace the structure. That figure should not include the value of the land, and it might be more or less than how much the home would fetch on today’s real estate market. Work with your insurance agent to come up with a good estimate. Don’t rely on an amount required by your mortgage company. That level is designed to protect the lender’s interest.
Home insurance policies automatically cover household contents, such as clothes, furniture and applicances, up to a certain percentage of the value for which the home is insured. So if the contents coverage is 40 percent, and the home is insured for $600,000, then your belongings would be insured for $240,000. You can get more coverage by paying a higher premium.
Understand the difference between actual cash value coverage and replacement cost coverage. Actual cash value coverage reimburses you for the value of the item destroyed, minus depreciation. So if a fire destroys a 5-year-old couch, you get reimbursed for the amount you’d expect to pay for a 5-year-old couch. With replacement cost coverage, the insurance company pays for buying a new item to replace the destroyed property.
Replacement cost coverage is more expensive than actual cash value coverage, but you’ll be glad you paid the extra premium if you ever have to buy new belongings after a disaster.
Another important thing to keep in mind is that homeowner insurance includes limits on valuables, such as fine art, antiques, electronic equipment, coin collections, jewelry and other items. You can get additional coverage for these items by purchasing an endorsement, or “floater,” to provide full protection.
The best way to make sure your belongings are fully covered is to do a home inventory of all your stuff. The Insurance Information Institute’s KnowYourStuff.org website provides instructions and free online software to complete the task. An inventory will also help the process go smoothly with the insurance company if you ever have to make a claim.
Meanwhile, remember that home insurance does not protect property against damage from floods or earthquakes. You need to purchase separate flood insurance or earthquake insurance policies to get coverage for these risks.