Anything can happen. When you have a home and a family to look after, knowing you’re ready for every possibility is a huge relief. Your home insurance has you covered in case your home is affected by fire, leak, theft, and natural disasters – or at least it should. What many homeowners don’t know is that they’re underinsured, and they don’t find out until it comes time to make a claim.
Once you’re making a claim to recover from residential damage, it’s too late to fix the mistake. By reviewing your policy now, you can take proactive steps to make sure that the coverage you purchased won’t leave you paying out of pocket.
Underinsured homes are more common than you might think. An estimated 60 percent of homes are underinsured, and while some homeowners know they are underinsured so that they can pay lower premiums, in many cases the situation is simply an oversight.
What Does Your Policy Actually Cover?
First, you should be aware of what your policy covers. A common misconception is that coverage is based on the market value of your home. Your policy covers the replacement costs of the actual structure of your home and belongings as well as some other expenses, but not the market value of the property.
There are three key elements to your policy: Structure, Personal Contents, and Additional Living Expenses. Each of these sections breaks down differently and you should look at the specific limit for each area, not just the total policy limit.
Does Your Policy Cover Construction Costs?
Find out what current construction costs look like in your neighborhood. If your home is newly constructed or you’ve recently refinanced, you likely have a recent appraisal that will tell you the replacement cost, actual cash value, and market value. Without a recent appraisal, you can call local developers and ask about the average costs per square foot in your area.
If you have done any renovations or built extensions on your home, your policy should reflect the higher square footage or more expensive materials. If you spend at least 5% of your home’s value renovating, think about increasing your coverage. Always inform your insurance company when you make an improvement to your home if re-doing that same improvement would leave you significantly out of pocket.
Are Your Personal Contents Sufficiently Insured?
When it comes to the Personal Contents part of your policy, there are two key terms: Actual Cash Value and Replacement Cost. Under Actual Cash Value, your insurer will only provide you with the depreciated value of your personal belongings. You won’t have enough to replace everything with new items. It can be tempting to take out a policy with this coverage for the lower premiums, especially if you don’t realize the full implications.
The other thing to look out for is special limits on valuables. Your homeowners policy may include these special limits which leave you without enough to replace valuables like jewelry or artwork that needs to be separately appraised and insured.
Will Additional Living Expenses Maintain Your Quality of Life?
The goal of Additional Living Expense coverage is to help your family maintain its quality of life while your home is unlivable without going out of pocket to do so. Take a look at your coverage, and see how much you would receive per month for a year or so. Compare that coverage to rental costs for comparable homes in the area and see if coverage would be too tight.
Reviewing your insurance policy every year or so is the most effective way to make sure you’re properly insured. Don’t get caught off guard.
