If you woke up tomorrow and learned a major storm was barreling your way, would you be ready? Not “grab the flashlight and emergency preparedness kit” kind of ready, though that’s certainly important. We’re talking about being able to replace your home should a storm, or other disaster, leave it heavily damaged or in ruins.
Although admittedly not the most exciting activity on anyone’s to-do list, taking time now to understand exactly what your homeowners policy does and doesn’t cover could save you a lot of money in the long run. For example, let’s say your house was insured for $200,000 and the cost of rebuilding it after a fire burned it to the ground was $300,000.
Guess whose pocket the additional $100,000 would come from? Yours. That would not be the case, however, if you had opted for full replacement coverage, and extended replacement coverage would have provided even more protection, paying 125 percent or more of the cost of rebuilding.
If sorting out the details of your policy seems a bit overwhelming, fear not. Answering these four basic questions can help you start the process:
Do I Have Enough Insurance to Repair/Rebuild My House?
The cost of rebuilding a home has nothing to do with its market value or the amount of your mortgage. What a buyer might be willing to pay for your home or the amount of money you still owe on it are not related to the current cost of the materials, labor and other services associated with rebuilding it from the ground up. In fact, at a time when the market value of your home might have declined, rebuilding costs might have increased.
Despite a major drop in construction activity since the Great Recession, construction prices have actually risen significantly, according to the Insurance Information Institute (III). You need to be sure your policy covers the cost of rebuilding your home at current construction costs, the III advises.
A Replacement Cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. An Extended Replacement Cost policy provides additional coverage of 25 percent or more over the limits of your policy, which can be critical if there is a widespread disaster that pushes up the cost of building materials and labor. With Guaranteed Replacement Cost coverage, the insurer will pay for rebuilding your home no matter how much it costs, but these policies can be expensive and hard to find.
Additional coverage options include Inflation Guard, which automatically adjusts the rebuilding costs of your home to reflect changes in construction costs, and Ordinance or Law coverage, which can help you cover the cost of meeting new, often stricter, building codes when you rebuild.
Your insurance agent or company representative can help you determine the cost of replacing your home, but for comparison purposes, you may want to do some research on your own or use outside sources. For a rough estimate, the Rocky Mountain Insurance Information Association suggests multiplying the building costs in your area per square foot by the total square footage of your house. To find out what the building rates are in your area, consult your local builders association or a reputable builder. Professional replacement cost appraisers can also provide this service. (The fee can run about $300.)
Another option: Online calculators available through one of three services, HM Facts, AccuCoverage, or e2value “Pronto”. All three can give you a ballpark figure for a fee of $25 or less. This is the same type of software used by insurance companies to calculate replacement cost.
Remember to include in your calculations any special features in your house, such as a finished basement, high-end woodworking, or an upgraded kitchen or bathrooms. You’ll also want to include any structures on your property other than your home, such as sheds and detached garages. Those are typically covered for 10 percent of your Dwelling Limit, the amount of homeowners coverage declared on the first page of your policy. Another coverage, Loss of Use, can help pay for living expenses while your home is being replaced – typically covering you for up to 20 percent of your Dwelling Limit.
And if you want to go green, some insurance companies offer optional Green Rebuilding coverage. Adding this type of coverage will expand your coverage limits when you use environmentally-friendly materials or processes to repair or rebuild or when you upgrade to more energy-efficient systems and appliances when you replace those involved in a covered loss.
Do I Have Enough Insurance to Replace My Home’s Contents?
If disaster strikes, more than just the structure of your home is likely to be damaged. Furniture, clothing, valuables and other possessions inside your home can be damaged or destroyed. A standard homeowners policy typically provides coverage of 50 to 70 percent of the Dwelling Limit for contents. This means that if you have $100,000 worth of coverage on the structure of your home, you would likely be covered for $50,000 to $70,000 to replace the contents of your home.
Check to be sure the level of replacement coverage in your policy is adequate. Although your policy may cover expensive items, such as jewelry, it may limit the payout to $1,000-$2,000. Other items that may be capped include silverware, computer equipment, art, antiques, stamps, coins and guns.
You also need to know what kind of personal property coverage you have. A Cash Value policy pays the cost of replacing your belongings minus depreciation. A Replacement Cost policy reimburses you for the full, current replacement cost. Your insurance agent or company representative can advise you on which type of policy is best for your situation.
The best way to determine the amount of coverage you need is to conduct a home inventory. Having an inventory will also make it easier to prove your losses for tax purposes. To simplify this task, the National Association of Insurance Commissioners has a free app for iPhone and Android, as well as a downloadable print-ready home-inventory checklist. Be sure to include serial numbers, photos or video, as well as receipts or appraisals.
Once you know what you have and how much it will cost to replace, you can add coverage with a scheduled personal property endorsement or floaters, which typically cost about $20 per $1,000 of property value annually, though this can vary by location. Be sure to keep this inventory in a safe place and to take it with you should there be a disaster.
Does My Homeowners Insurance Cover All Disasters?
Standard home insurance policies provide coverage for disasters such as fire, lightning and hurricanes. They do not include coverage for flood, including flooding from a hurricane (although there are steps you can take to minimize flood damage). Flood insurance is available through the National Flood Insurance Program, but can be purchased from the same agent or company representative handling your homeowners insurance.
Some insurers offer Excess Flood Protection, which provides higher limits of coverage than the NFIP in the event of catastrophic loss by flooding. Typically, there’s a 30-day waiting period before the insurance becomes valid, so plan ahead to be sure you’re covered if the need should arise.
Other disasters not typically covered by standard homeowners policies include war, a nuclear accident, landslides and earthquakes. Most insurers sell earthquake insurance as an endorsement to the standard homeowner policy. In California, the non-profit California Earthquake Authority also provides insurance policies to homeowners in that state as well as information on what steps homeowners can take to reduce the risk of earthquake loss.
Is my coverage up-to-date?
An annual insurance policy checkup is the best way to ensure that your coverage keeps up with local building costs and changes in the value of your home and personal property. Such changes may be due to fluctuations in the market, improvements you make to your house, or appreciation in the value of jewelry or other personal possessions.
Know what your deductibles are so you know how much you’ll be expected to pay before your coverage kicks in. You should also determine if there are any exclusions in your policy for certain types of damage, such as mold, or if your home is in an area at high risk for floods, wildfires, hurricanes or earthquakes.
Remember, your insurance policy is a contract and you need to know what’s in it. Insurance agents and company representatives are here to help, but you have a role as well. Bottom line: Don’t put your policy in a drawer somewhere and let it collect dust. Review it every year to make sure you’re covered.