Home insurance and underinsurance

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Having the right amount of home insurance can be the difference between rebuilding a home or needing another place to live if your home is destroyed.

Underinsurance is common. About two out of three homes are underinsured — some of them by as much as 60% or more. Three out of five homes are underinsured by at least 20%.

Your home is your most valuable asset, and being underinsured means you won’t have enough coverage should a fire or storm damage your home. Most people aren’t prepared to pay out-of-pocket for a rebuild or significant repairs, so you need to ensure you have the right amount of coverage.

When choosing insurance coverage for your home, you need to protect the home’s structure. You also want liability coverage and personal property damage coverage. Liability protects you against lawsuits. Personal property coverage protects what’s in your house. Pretty much anything not part of the structure is covered under personal property protection. That’s often 50 percent of the dwelling coverage’s value.

Another factor that plays into the home insurance costs is the deductible. The higher the deductible you choose, the lowest your premiums.

Deductibles are usually between $500 and $2,500. If you need to file a claim later, you pick up the cost of the deductible. The insurance company pays the rest of the claim.

Home insurance can cost thousands of dollars each year, but how do you make sure you’re not underinsured? Here are some tips.

Reassess your policy

Review your policy to make sure the coverage still meets your needs. For example, if you remodel your home, the value likely will increase. Your insurance coverage should increase as well.

That also includes telling your insurer if you expand or renovate your home. That work adds value to your home. Independent Insurance Agents and Brokers of America estimates that one in four remodeling projects increases the value of a home by more than 25 percent.

“You need to know how much it would cost to rebuild your home. This can be tricky to determine, but many end up underinsured because they just start a home policy with the costs to rebuild at that point in time, but then never think to update their structure limits as the years pass by,” Penny Gusner, a senior consumer analyst with Insure.com, says. “Construction costs continue to rise, so I advise consumers to use tools available to find out how much it would cost to rebuild each year at their renewal period.”

Gusner suggests using online calculators or asking your agent to crunch the numbers for you to determine your rebuilding costs. Finding out a home’s replacement value includes multiplying the local building costs per square foot by the home’s total square footage.

Beyond square footage, other factors that determine cost is: construction costs, types of exterior wall construction, home style, number and types of homes, the kind of roof, and added features.

Once you have this information, you can update the structure limits portion of your policy. You can check out our Home Insurance Advisor tool to help you figure out if you’re properly insured.

Don’t go with home insurance minimums

Mortgage lenders require a minimum amount of liability protection equal to your unpaid mortgage balance. This amount typically is around $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 blamed for injuries or property damage. This coverage can also help you if your dog bites a visitor.

The coverage helps with property damage, medical bills, pain and suffering, and lost wages. It also handles legal costs and death benefits. Increasing liability coverage doesn’t usually increase your rates much.

A policy with $100,000 in liability and $200,000 in dwelling coverage with a $1,000 deductible costs an average of $1,228. The same policy with $300,000 liability protection averages just $16 more — $1,244.

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 replacement coverage

Replacement coverage, which is standard in some policies and optional in others, provides a cash benefit to repair or rebuild your home or replace damaged, destroyed or stolen items.

Most insurers measure the replacement cost based on the original price you paid for the items and your home’s original purchase price.

There’s also another approach insurers use to calculate your payout in these situations — actual cash value. Actual cash value factors in depreciation, so it offers less coverage than replacement coverage.

So, let’s say you bought a $1,000 TV. With replacement coverage, you’d get reimbursed that amount to buy the same TV. If you have actual cash value, the insurer would pay you what the TV is worth after years of viewing.

If this coverage isn’t enough to meet your needs, you’ll want to make sure you have replacement coverage.

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Consider inflation protection

It’s a good idea to get an inflation guard in the policy. That add-on increases your insurance as the cost to build grows.

An inflation guard endorsement expands your home insurance policy, so you have enough coverage to rebuild your home. The endorsement usually gauges inflation annually and then adjusts your policy.

This protection can be especially important if you live in an area with high building costs.

Update your valuables list

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.

Get flood insurance

Standard home insurance doesn’t offer flood coverage but does cover water damage that’s man-made like leaky pipes and overflowing tubs.

You can get a rider added to your policy that covers you if there’s a water or sewer line backup, but you’ll also need to buy a separate flood insurance policy.

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. Twenty percent of flood claims occur in areas that aren’t considered high risk.

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

Even if you increase your home insurance, there are ways to save elsewhere. Here are some options to reduce your home insurance costs:

Shop for policies and compare the same level of coverage. 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 under the same insurer. Bundled discounts can save you 15 percent off your rates.
Ask about 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 cause much heartache later if your home is destroyed. So, having enough home insurance is critical for you as a homeowner. No matter what insurer you choose, make sure you have enough home insurance coverage.