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Homeowner's Insurance Levels: How Much Coverage Is Enough?

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Due to the sheer amount of advertising and marketing targeted at consumers for auto insurance policies, people have become more aware of their auto insurance coverage and cost. Homeowner's insurance, on the other hand, is another matter entirely. These premiums are often seen as a necessity--embedded in your mortgage and escrow payments to the point where you aren't really aware of what your coverage gives you. That makes it difficult to determine whether your coverage is correct or not. 

To better understand where your insurance premium goes--and how to determine if you're paying too much--you'll need to understand the four areas that homeowner's insurance covers. These areas include:

  • The cost to repair/rebuild your home's structure in the event of a disaster
  • Replacement costs for your personal belongings
  • Liability coverage for injuries on your property
  • Living expenses if you find yourself relocated while repairs are made

Repair/Rebuild Cost

This is commonly misunderstood portion of your homeowner's policy, and a point where people often choose too little coverage. What's important to know about this is that the cost you should look at is the cost to rebuild--not purchase--your home. Too many people consider the cost they paid for their home and start from there. Others make an ever larger mistake and consider their home's current market value.

Even though certain factors, such as land costs, won't need to be repeated in the event of a rebuilding, labor for clearing debris and inspecting the foundation should be added into the mix. These costs are extensive, and often drive the cost of rebuilding much higher than market value. This is a prime reason why experts suggest that 64% of homeowners are lacking adequate coverage.

You'll also need to consider whether or not your policy has an extended replacement percentage. In the event of a major disaster, labor and materials costs can skyrocket due to increased demand. Your policy might have something built-in to deal with that. If it doesn't, however, you'll need to consider adding coverage on top of the normal rebuild cost as well.

Personal Belongings

This area is much more straightforward. The first step is to just tally up the cost of all of the belongings in your home. That said, there are two important things to consider when determining these values.

First, you likely bought items like clothes at a discount. If you were to lose all of them in one shot, you'd need to replace them immediately--eliminating the option of shopping for a reasonable price. Also, technology items might not even have a current model that acts as a suitable replacement. You'll want to use the cost to replace them with current options--not the choices you made 5 years ago or more.

Liability Coverage

Medical costs continue to rise. It's difficult for a layperson to estimate what the cost would be if a person slipped and broke their hip, or if an on-site injury required a trip to the hospital. What is easy to see is that these costs aren't minor--and your coverage should be set with that in mind. You should likely take the advice of your insurance agent here, and when in doubt, aim high.

Living Expenses During Repairs

Your living expenses during a repair or rebuild could differ wildly from someone else. For example, if you have relatives nearby that would help you find lodging during the repair, your out-of-pocket costs would be considerably lower than if you required hotel accommodations for a month. Also, the cost of living in your area will have a significant impact on your total bill during this time.

However, you'll need to estimate your time out of your home to understand how to set these values. A good rule of thumb is that a complete rebuild, under normal conditions, could take from several weeks to several months to complete. In times of crisis, this can sometimes be accelerated--however, if there are 55 dislocated families, you might be stuck waiting for a while.

Unfortunately, there aren't any hard and fast rules about coverage levels. The good news is that, by breaking down each of these categories, you'll be able to arrive at the number you need to give you and your loved ones peace of mind. To read more about homeowners insurance, click here for more info.