Whether you’re moving in for the first time or you’re comfy and settled, having enough insurance coverage for your home is vital. You certainly don’t want to be caught underinsured if your home is ever damaged.
Sure, it’s best to make sure your coverage is solid before you even move in, but it’s just as important to do this continually.
Likewise, it’s just as essential to make sure you’re not paying for more than necessary to adequately insure your home.
Here’s how to make sure you have the perfect amount of insurance coverage for your home, thanks to our friends at MAKZ Insurance in Houston!
1. Avoid Cheap Premiums That Will Leave You Underinsured
“If your home is 2,000 square feet, you really want to have at least $200,000 worth of coverage and up. Anything below that, and it’s honestly going to be undervalued.”
—Ken Robinson, CEO of MAKZ Insurance
Beware of shortchanging yourself on homeowners insurance with premiums that are too low.
Unfortunately, many homeowners get so excited about paying off their loans that they focus on getting low monthly premiums instead of substantial coverage.
This could even include skipping critical add-ons just because they’re not required.
If a disaster hits, homeowners with bare-minimum coverage will be in for an unpleasant surprise: like the complete responsibility for home repairs!
The top 3 ways property owners can avoid being underinsured:
- Get adequate replacement cost on your policy.
- Annually review coverage with your agent or broker
- Optional: Add on endorsements to cover increases in repair materials
Mortgage companies require you to have homeowner’s insurance, but it’s also extremely important to consider certain add-ons or endorsements. This way, you can make sure you’re fully covered (because homeowner’s insurance won’t compensate for everything).
2. Know How to Separate Replacement Cost from Home Value
So, you just bought a home? Congratulations!
After closing costs, a down payment, and buying furniture, you definitely need to save money wherever possible.
If you’re a new homeowner, try getting this out of the way when speaking to your insurance broker or agent. Ask for their replacement cost calculator (or request an estimate to make sure you have enough). Then, ask how it’s calculated.
Been in your current home for a while? Simply call your insurance company and ask the same questions.
Most often, your premium will be based, at least in part, on Coverage A. This is the amount of your building’s structural coverage limits. It’s also usually the main number listed under your policy coverage.
Insurance brokers get a lot of questions regarding the cost of their home and how this measures up to its actual insured amount (or, its replacement cost).
The two most common concerns homeowners have about their coverage versus their home’s cost are summed up below.
When replacement cost is more than the value of your home:
- Insurers take into account the type of materials used to build your home (stucco vs. brick, tile versus wood flooring, etc.)
- Replacement cost factors in the value of materials and technique at the present time (i.e., luxury design vs. builder’s grade vs. antique)
When replacement cost is less than the value of your home:
- Homeowner’s insurance covers only your building structure—so while land isn’t covered, it still bumps up the market value when you buy a home
- Land can’t be physically replaced which is why homeowner’s insurance policies don’t include it in the replacement cost (farm policies are separate)
3. Calculate Replacement Cost With a Simple Formula
You’re probably wondering what replacement cost even means…
Replacement cost (or replacement value) is one method of how your homeowner’s policy can pay you. It includes the replacement of your home where it currently stands, using the same quality of building materials, if your home is a total loss as outlined in your policy.
The reality is, most homeowners don’t have what’s called a true replacement cost (the ideal amount to fully cover damages). So their properties are often undervalued and don’t include the market value, depreciation or appreciation of their homes.
Is Your Replacement Cost Enough?
Get your property appraised and adjust your replacement value with your insurance company as needed. Do this until you have a true replacement cost. This way, you’re not paying more or less than you need to cover potential damages.
Ask your homeowner’s insurance company if they can recommend appraisers and connect you with them.
Not only are the costs of rebuilding materials and labor always increasing… they jump even higher after a hurricane or flood.
With cheap premiums—plus any appreciation in your home value—a low replacement cost will leave you responsible for astronomical out-of-pocket costs.
Check out the formula below to see if you may need to adjust your replacement cost.
Use This Simple Formula for Calculating True Replacement Cost
Ken says that the *true replacement cost (the ideal coverage where you won’t have to pay out-of-pocket) is around $100 per square foot. Below, he gives a mathematical breakdown of how you can calculate your own replacement cost.
*True Replacement cost: 100 x total sq ft.
Minimum Replacement cost: 0.85 x total sq ft.
Your current replacement cost < Result = Undervalued Replacement Cost
Your current replacement cost =/ ≈ Result = Bare Minimum Replacement Cost
Your current replacement cost > Result = True (Ideal) Replacement Cost
Note: this does not account for specific insurance company rates, nor any upgrades that did not modify your home’s area.
Are you Going to Protect Your Home?
Even if you’ve already lived in your home for awhile, it’s good to review your home insurance to see where you stand in the event you’d need to file any claim.
For new homeowners: don’t let the excitement of moving into a new home distract you from protecting it with the right amount of insurance coverage!