For most of us, our home represents not just a place to live, but also our most significant financial investment. It’s a place where treasured memories are made and the future is built. Protecting this asset is incredibly important, and that’s where home insurance steps in. However, simply having a homeowners insurance policy isn't enough. To truly safeguard your investment, your insurance coverage must accurately reflect your home’s full value.
This guide is designed to empower homeowners to assess and adjust your home insurance policy, ensuring your home is properly protected for its full value.
At a glance:
Failing to ensure your coverage aligns with your home's worth can lead to significant financial risk. Imagine facing damage from a storm or, worse, a total loss, only to discover your policy doesn't cover the full cost of repair or to rebuild a home. This is the harsh reality of being underinsured.
Several key moments should prompt you to reassess how much home insurance you need based on value of home:
The seven steps outlined below will help you determine whether or not your home insurance is adequate for your needs, and what to do if you notice coverage gaps, limitations, or want to adjust coverage limits.
Understanding your home’s value is the first step in determining your home insurance needs based on the value of your home. To do so, it’s important to distinguish between two key factors: market value and replacement cost.
Market value is the price your home would likely sell for on the current real estate market. It's influenced by factors like location, neighborhood amenities, and recent sales of comparable properties.
Replacement cost, on the other hand, is the estimated cost to rebuild your home with new materials of similar kind and quality at current prices. This amount is influenced by factors such as the size of your home, the type of construction, the materials used, and local labor costs.
Property assessments, appraisals, and current building costs all play a role in determining your home's replacement value. While a recent appraisal may provide you with a general idea of the home’s market value, it’s important to get an estimate of the cost to rebuild. Construction costs can fluctuate, so relying on an outdated valuation can leave you underinsured.
When reviewing your homeowners insurance policy, you'll likely encounter the terms “Actual Cash Value (ACV)” and “Replacement Cost (RCV)”. Understanding the difference between these two will help you be better equipped to make informed decisions about your coverage.
Actual Cash Value (ACV) coverage pays the replacement cost of the damaged property minus depreciation. Depreciation is the decrease in value due to age, wear and tear, etc.
Replacement Cost coverage, conversely, pays the cost to rebuild a home or repair damaged property with new materials at today's prices, without deducting for depreciation. This type of coverage aims to put you back in the same financial position you were in before the loss. Policies with replacement cost coverage offer significantly more protection.
For example: A storm damages your eight-year-old roof. If you have RCV coverage, your insurance company will likely pay the full cost to replace the roof with a new one (minus your deductible). However, if you have ACV coverage, the payout will be the current value of your eight-year-old roof, which will likely be less than the cost of a new roof, leaving you to cover the difference out of pocket.
Your policy's coverage limits dictate the maximum amount your insurance company will pay out in the event of a covered loss. It’s important to ensure these limits are adequate to cover potential losses.
Pay attention to the dwelling coverage limit, or, the portion of your policy that protects the physical structure of your home, including the walls, roof, foundation, and attached structures. This limit should ideally match the estimated replacement value you determined in Step 1. If your dwelling coverage is significantly lower than the cost to rebuild a home, you risk being underinsured.
Remember: renovations and home improvements directly increase your home’s value. If you've added a new addition, remodeled your kitchen, or made other substantial changes since you last reviewed your policy, your current coverage limits may no longer be sufficient.
Your homeowners insurance policy typically extends beyond the main building. Most policies include other structures coverage for detached structures on your property, such as garages, sheds, fences, and gazebos. Review your policy to understand your specific coverage limits for these structures and ensure they are sufficient to cover potential damage or loss.
Furthermore, personal property coverage protects the belongings inside your home, including furniture, clothing, electronics, and appliances. The standard coverage for personal property is usually a percentage of your dwelling coverage. However, the total value of your items might exceed this standard limit, requiring extended coverage limits.
To assess your personal property coverage needs, consider creating an updated home inventory. This inventory should list your valuable items and their estimated replacement value. This documentation can be invaluable in the event of a claim—and helps you determine if you need to increase your personal property coverage.
Beyond dwelling, other structures, and personal property coverage, additional options can provide enhanced protection. These are often added to your base policy as endorsements or riders.
For high-value items such as jewelry, artwork, or collectibles, standard personal property coverage might not provide enough protection. Consider scheduling these items separately with specific coverage limits to ensure they are fully protected.
It’s also important to consider coverage for natural disasters. Standard homeowners policies typically exclude damage from floods and earthquakes. If you live in an area prone to these events, you'll likely need to purchase separate flood insurance and / or earthquake insurance policies.
These are not the only additional coverage options available on the market. Talk to your independent insurance agent to discuss coverage add-ons that are right for your unique circumstances.
While protecting your physical property is essential, liability coverage is equally important. This part of your homeowners insurance policy helps protect you financially if someone is injured on your property or if you accidentally damage someone else's property. It can help cover legal defense costs and settlements if you are sued.
Review your personal liability coverage limits to ensure they are adequate to protect your assets. Consider the potential for significant financial loss in the event of a lawsuit.
Your home insurance needs based on the value of your home are not static. Because they evolve over time due, it’s important to review and update your policy regularly and whenever significant changes occur.
Inflation and market changes can impact construction costs, potentially increasing the amount it would cost to rebuild your home if it were damaged or destroyed. Don't wait until a loss occurs to realize your coverage is inadequate.
Consider reviewing your policy with your insurance agent on an annual basis. An experienced agent can help you reassess your coverage, understand the implications of changes in your home’s value, and ensure your policy continues to meet your evolving needs.
Protecting your home’s full value requires proactive steps and ongoing attention. Take the time to read and understand your homeowners insurance policy’s coverage options, limits, exclusions and even coverage gaps.
We also recommend working with an independent insurance agent, as they can provide quotes from multiple insurance company options, allowing you to compare policies and find the best coverage at a competitive insurance cost.
At Openly, we understand the importance of having transparent coverage and customizable options to protect your most valuable asset. Our modern insurance solutions are designed to help homeowners like you stay fully protected, ensuring that your insurance coverage accurately reflects the true value of your home. Don't wait—take the steps today to secure your financial future and protect your peace of mind.
We provide this information to help you understand insurance. Any coverage is subject to the terms of your policy. Please refer to your policy and declarations page for complete terms, conditions, exclusions and coverage details. Openly may provide links that lead to an external website that may promote goods and services that Openly does not endorse. We are not responsible for the content, claims, or representations made on the linked website. Please review their terms and policies before engaging with any offerings.