Home insurance: How to avoid being underinsured

Your home is underinsured if you don’t have enough coverage to rebuild it from the ground up at today’s prices and enough to replace all of your personal property.

Nationwide Insurance, a major home insurance company, estimates that two out of three homes are underinsured, and they’re underinsured by 22% of average. But many homes may be underinsured by a much bigger margin of up to 60%.

If you’re underinsured when you file a claim, you could find yourself out of pocket by thousands of dollars. Not only will you not have the coverage you need for a total loss of your home, but even a smaller claim can be affected by underinsurance. Find out how to avoid underinsuring your home here.

What does it mean to be underinsured?

Underinsured means that you don’t have enough coverage to fully protect your home and its contents. In insurance company terms, you are underinsured if your dwelling coverage amount is not at least 80% of the calculated replacement cost of your home.

In a total loss, not having 100% replacement cost can mean you don’t get enough from insurance to rebuild. In a smaller claim, the insurance company can reduce your payout if you aren’t carrying at least 80% replacement cost. Known as the 80/20 rule in home insurance, this protects home insurance companies from paying out claims on policies that aren’t priced correctly for the coverage needed.

You may also be uninsured in other areas. For example, you may not have enough personal property coverage, or may only be carrying actual cash value coverage for personal property, which pays out the depreciated value of your items. Liability is another common area where you can be underinsured, especially if you have a lot of assets to lose in a lawsuit.

How to avoid underinsuring your home

To avoid being underinsured, review your policy and all of the coverages carefully, both when you buy it and at every renewal. You need to ensure that the dwelling coverage matches the replacement cost of your home, which can change over time. For example, if you remodel your home, the value likely will increase. Your insurance coverage should increase as well. Even without a remodel, construction costs go up over time and inflation affects replacement cost.

Insurance companies use complex calculators to determine the replacement cost of your home, but they can only work with the information they have. Go over the details of your home with your insurer, including square footage, building materials, special features and any upgrades to the home. The more accurate the information on your home, the more accurate your replacement cost will be.

From there, review the other coverages on your home policy to make sure you have enough coverage in every area.

You can check out our Home Insurance Advisor tool to help you figure out if you’re properly insured.

Consider extended or guaranteed replacement cost coverage

To guard against inflation and other increased costs that can leave you underinsured, you can purchase an endorsement to extend your coverage.

Extended replacement cost provides a specific amount beyond the dwelling coverage, usually 25% or 50%. Guaranteed replacement cost means the policy will pay out whatever is necessary to replace the home.

Get replacement cost coverage for personal property

Replacement cost coverage is standard for the home itself, but not for your personal property. That’s covered at actual cash value.

Actual cash value factors in depreciation, so it won’t pay out the amount needed to replace all of your home’s contents. You can upgrade to replacement cost coverage to ensure you can replace everything new if you need to.

Properly insure valuable items

You should consider keeping an updated inventory of all the valuables in your home. These items typically are protected under the personal property section of your policy but have coverage limits that won’t fully reimburse you for the costs of these items.

In this case, you can purchase additional coverage in the form of a rider or endorsement to your policy to make sure you’re fully covered.

Buy enough liability coverage

The standard home insurance policy includes liability coverage at $100,000. That’s usually not enough. Insurance experts recommend at least $300,000 of liability coverage.

Liability insurance protects your home in case you or a family member living with you are responsible for injuries or property damage. This coverage can also help you if your dog bites a visitor.

If your assets exceed $500,000, you can get a separate umbrella policy up to $5 million. Umbrella insurance gives you added liability protection for all of your possessions.

Get flood insurance

Standard home insurance doesn’t cover floods. Mortgage lenders require people who live in flood zones to get home insurance. However, flood insurance can be a good idea whether or not you live in a flood zone.

You can buy a separate flood insurance policy through either the National Flood Insurance Program (NFIP) or a private insurance company that works with the NFIP.

How to save on home insurance

Here are some options to reduce your home insurance costs without cutting coverage:

• Shop around and compare rates. Check out our Best Home Insurance Companies page during the home insurance buying process.
• Increase your deductible. This means you’ll have to pick up more of the cost if you file a claim, but you can also save hundreds annually by increasing your deductible.
• Bundle your home and auto policies with the same insurer for a discount.
• Ask about other discounts. Beyond bundled discounts, insurers also often provide lower rates for people with security systems, long-time members, and those who haven’t filed claims lately. 

Being underinsured can isn’t worth the risk; make sure you have all of the coverage you need. There are many ways to cut costs without giving up coverage.

Sources

Nationwide. “Home insurance: How to avoid being underinsured” Accessed June 2024

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