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How Much Home Insurance Do I Need?
by Brandon Cornett
Planning to buy a home in the near future? If so, you will need to purchase homeowners insurance to protect your investment. You also need the home insurance in order to close on the property. That's because most mortgage lenders, by law, cannot allow a borrower to close on a property until they have a home insurance policy in place.
Without question, there are plenty of good reason to buy homeowners insurance for your new property. So this article will skip the "should I buy" question and address the "how much do I need" question instead. Many buyers find themselves asking this question — how much homeowners insurance do I need — so we will address that question in detail.
How Much Insurance is Enough?
To answer this question accurately, you will need to work with your insurance agent to come up with a figure. The agent will probably use a cost estimator to determine what it would cost to replace the home and its contents. Typically, this will only include the home and the contents inside it — not the land on which the home sits.
Let's talk about the three basic components of home insurance coverage. Everything else will make more sense, once we discuss this. When you purchase homeowners insurance you are covering three things (or you should be), and they are:
- The actual home (dwelling coverage)
- The contents inside it (personal property coverage)
- Lawsuit protection (liability coverage)
We have talked about the home itself already. In most cases, an insurance agent will come out to see the property and will insure it for the current value (at the time of policy creation). This is the dwelling coverage section of your policy.
Keep in mind, however, that the cost of construction rises over time. So you might want to ask your insurer if your policy includes a "guaranteed replacement cost" provision. Basically, this states that they will cover you for the full cost of replacing the home, even if the future cost of construction is more than the policy coverage. Some insurance companies will offer this, while others will set limits (for example, by agreeing to cover 130% of the dwelling coverage amount).
Personal Property Insurance
As for the contents of the home, there are a couple of things to keep in mind. Some insurance companies will automatically set the personal property coverage amount as a certain percentage of the dwelling coverage amount, such as 50 or 75 percent.
It's usually best to have some form of personal property replacement guarantee in your policy. This means that the insurance company will cover the full replacement cost of your belongings, as opposed to only covering their depreciated value. If your insurer does not offer this as part of their standard policy, you can probably add it on as a "rider" for a very small price.
How Much Liability Coverage?
As a homeowner, you have a certain liability associated with your home (whether you realize it or not). For example, if somebody gets hurt on your property, there is a chance you could be sued for damages. Liability coverage is the part of your homeowners insurance policy that protects you from such lawsuits.
Most policies come with a minimum of liability coverage, usually starting at $100,000. But if your assets are worth a lot more than that, it's probably a good idea to increase the amount of liability coverage. While there is only a remote chance you will be sued, the results can be financially severe.
Here's the key concept to keep in mind regarding liability coverage. You can usually upgrade this type of coverage with very minimal cost to you. For example, it's possible to increase liability coverage from $100,000 to $300,000 for as little as $20 difference in the policy cost. It's something worth considering.
Updating Your Home Insurance Coverage
There's one last thing I want to address, and that is appreciation — the rise in your home's value. Despite the cyclical fluctuations of the market, home values typically rise over time. So it's wise to reassess your insurance policy every few years in relation to the current value of your home.
For example, if you bought the home at $200,000 and insured it at that level, but your home's value five years later was closer to $300,000 ... you would want to increase your insurance coverage.
Lastly, keep in mind that basic policies do not cover damages caused by earthquake and flooding. So depending on where your home is located, you may need to purchase earthquake or flood insurance separately.
I hope this article has helped you understand the world of home insurance and policy coverage. Now you are better prepared to answer that common question among home buyers — how much homeowners insurance do I need anyway?