Home Insurance: Too Much, Not Enough, or Just Right?

Don’t count on Goldilocks to find the perfect home insurance policy for you – her research results in spoiled food, broken chairs, and mussed beds. You’ll have to do it yourself – or with the help of a licensed agent. But beware – you don’t want to be over-insured any more than you want to be underinsured.

Yes, you really can have too much coverage – which means you’re paying premiums that are higher than they should be. Similarly, you don’t want to suffer a fire and find out you don’t have enough insurance to get your life back to normal.

Let’s examine these two situations:

Do you have too much coverage?

Standard home insurance policies typically come with six types of coverage – dwelling, other structures, personal property, loss of use, personal liability, and medical payments. (We’ll expand on some of these as we go.)

Dwelling coverage typically has the largest impact on your premium – it’s the part of your policy that pays to repair or replace your home if it is destroyed by a covered peril such as fire or wind. There are three ways you can pay too much for dwelling coverage:

• Your limit is set at the real-estate value of the home. When you buy a home, you’re buying much more than the physical structure – you’re paying for the land, the location in a particular neighborhood, and even to be in a particular school district. None of those factors into how much it will cost to rebuild the house – that price depends primarily on the size of your home, local construction costs, and any upgrades. Use this calculator to get an idea of how much it will cost to replace your house to make sure you don’t have too much dwelling coverage. It’s not necessarily too much if you have more coverage than the price of your home either.
• You have guaranteed replacement cost coverage. Some buyers purchase this because they’re concerned about spikes in the cost of building materials that could occur after a natural disaster. Others get it because changing building codes can require more expensive materials to be used in construction. It typically covers a home for up to 25% more than the replacement cost. Of course, you’ll pay more.
• You have cost-of-living escalators that are set too high. Some policies come with cost-of-living escalators that increase your coverage, and your premiums, to account for inflation. Over time, these increases could exceed the actual replacement costs.

You also could have too much contents coverage – policies typically set your limit for this coverage, which could repair or replace items in your house damaged by a covered peril, at 50% to 70% of your dwelling coverage. What’s the value of your stuff? Make a home inventory – a list, complete with photos and receipts – of all the possessions in your home. The Insurance Information Institute offers free software to help. You may be able to adjust your coverage once you evaluate what you have.

In addition, consider your deductible – the amount you agree to pay toward a claim before your policy kicks in. In general, the lower your deductible, the higher your premium – all other factors being equal. One way to pay less for coverage is to increase your deductible. One caveat: Don’t raise the deductible to an amount you can’t immediately come up with.

Do you have too little coverage?

If you don’t have enough dwelling coverage, guess who pays the extra cost of restoring your home if it’s damaged by a covered peril? That’s right – you do. It’s a good idea to evaluate the amount of dwelling coverage you have each year and compare it with the replacement cost.

Similarly, watch your personal property limit as you add to your home inventory to make sure you have enough coverage. Also make sure you have the right kind of contents coverage. The two types are:

• Replacement cost: Pays you what it would take to replace items at today’s prices. It does not factor depreciation into the process.
• Actual-cash value: Pays what it would take to buy a similar item at today’s cost minus depreciation. While this coverage is cheaper, you might only receive $200 to replace a television you paid $600 to buy three years ago.

Another thing to remember about personal property coverage: There can be limits on certain high-value items such as artwork or jewelry. If your policy has these limits, you’ll need to schedule an endorsement to have full coverage for expensive items.

Do you have enough personal liability coverage? This is the part of your policy that covers you if someone is injured on your property or if someone in the household causes property damage and a lawsuit is filed. Policies typically start with a $100,000 limit for this coverage, but you can increase it to $300,000 or more for a few more dollars on your premium. Why worry about it? Say you lose a $200,000 lawsuit and only have a $100,000 limit – you’re on the hook for the rest.

Finally, home insurance doesn’t cover some disasters. You’ll need separate policies for earthquakes and floods, for example.

‘Just right’ coverage

So what’s the right amount of coverage? That’s up to you. You have to be comfortable with your protection and your premium. No amount of savings is worth being caught short when your house is damaged by a covered peril.
Written by Carrie Van Brunt-Wiley Realty Times Staff for www.RealtyTimes.com Copyright © 2014 Realty Times All Rights Reserved.