Purchasing a home is one of the biggest expenditures most people will make, and your mortgage lender will require you to have homeowners insurance to protect your investment. But how do you know if the amount of your homeowners insurance is enough?
Experiencing a loss is one of the more devastating things a homeowner potentially goes through. It can be even worse to find out your policy isn’t enough to cover your loss.
What does it mean to be underinsured?
The definition of underinsured is pretty straightforward: it means that despite having insurance, your coverage isn’t enough to allow you to fully recover from the loss. Put another way, the meaning of underinsured is that your claim amount will exceed your policy limits.
Unfortunately, a homeowner will generally find out they are underinsured at the worst possible time—after they’ve had a major loss and are filing a claim.
How can I tell if my homeowners insurance coverage isn’t enough?
There are no visible indicators of being underinsured. This means that you’ll likely need to do a bit of research to see if you need additional coverage.
There is one big issue that has impacted us all over the last few years that you might not realize also affects your homeowners insurance coverage: rising inflation.
Rising costs impact everything—including the materials used to rebuild your home after a covered loss, replacing your personal property items, and it even affects the labor costs associated with working on your home repairs.
What follows are some scenarios to consider if you are trying to determine whether you are underinsured.
I’ve had recent renovations
It’s exciting to renovate your home, and the pandemic led to a dramatic increase in renovation spending. Improving the physical attributes of your home—beyond just decorative improvements, like paint—do more than make it yours. Upgrades can also increase the value of your home, which is why it’s important to alert your insurance carrier if you’ve invested in renovations—or even while your home is being worked on.
Home renovation insurance is coverage available to homeowners undertaking substantial improvements to their homes. It protects your home while work is being done and covers against theft of materials, damage, or construction collapse while work is underway.
Kitchen and bathroom renovations can add thousands of dollars in value to your home. So, you want to make sure those investments in upgrades are protected. The average cost of a kitchen remodel in 2023 is about $26,000, with major remodels costing anywhere from $70,000 to $130,000. New flooring and cabinets, upgraded finishes, and updated appliances are all typically part of a kitchen remodel.
Consider this: if your homeowners insurance was calculated based on your old kitchen’s finishes and you haven’t updated your policy, your insurance claim will only cover replacements to the level of your old finishes if you experience a loss such as a fire.
It’s critically important to update your policy both during and following major renovations to ensure that these added investments in your home are properly covered.
I haven’t looked at my policy in years
Your homeowners insurance was designed to help you to recover from a covered loss and was calculated based on the costs associated with rebuilding when you first got your policy. The longer you’ve gone without examining how much coverage you have, the more likely you are underinsured.
As mentioned earlier, a lot of this has to do with inflation. While most homeowners insurance policies include an inflation guard—a steady and built-in increase in the dwelling coverage that factors inflation in—recent increases have outpaced the rates typically used by insurers.
Another factor to consider as time passes has to do with purchases over time. Your homeowners insurance policy covers your dwelling, which is the structure of your home, and your personal possessions, which are things like your furniture, clothing, and kitchenware.
Over time, you will likely replace some of your furniture, add new electronics, or outfit your kitchen with upgraded pots and pans. This all adds up. If your homeowners insurance has an outdated limit on your personal property coverage, any subsequent claims might not fully cover your loss.
My homeowners insurance policy doesn’t have any riders
If you don’t have any insurance riders, you might be underinsured. Your homeowners insurance policy has coverage limits and exclusions, and it’s important to know what those are. Frequently, jewelry and electronics have fairly low limits as part of your overall personal property insurance, such as a $1,500 loss limit on theft.
With the average cost of an engagement ring closing in on $6,000, a $1,500 limit would be well short of recovering a loss. The same holds true for electronics- limits apply.
The answer to making sure that your belongings are covered is to purchase valuable personal property insurance. These are separate insurance riders that act as companions to your insurance policy, providing additional coverage for your valuables. One or more home insurance riders might be needed if you have valuable artwork, jewelry, guns, or other collections.
I never conducted a home inventory
Most people don’t spend a whole lot of time thinking about how much money they’ve invested in furnishing their homes. That’s because for better or worse, we accumulate our “stuff” gradually, over time.
Because we make our purchases sporadically, we don’t stop to think about how much it would cost to replace everything at the same time. But, that’s exactly what happens when you file a claim after a covered loss. Unfortunately, that’s when you may discover that your personal property coverage is insufficient.
The best way to make sure that your belongings are properly covered is to conduct a home inventory. This may seem daunting at first, but technology can really help out. Use your phone to take pictures of your belongings in each room, remembering to photograph the inside of your closets and cupboards. There are also a number of apps available that can help to make this a much easier process than it was in the past.
The Insurance Information Institute has a detailed list of how to conduct a home inventory.
My initial policy was the minimum amount
Purchasing the minimum amount of homeowners insurance coverage might seem like a quick way to keep your premium reasonable, but it could cost you if you ever need to make a claim.
That’s because insurance companies price out insurance based on a combination of factors, including risks and replacement costs. If you are purchasing the minimum amount of insurance, to get that low price you’re usually agreeing to a lot of exclusions or very low coverage thresholds.
Even if you aren’t concerned about having to pay out of pocket to replace your belongings, buying the minimum amount of homeowners insurance coverage could leave you with inadequate liability coverage. If someone is injured at your home and you don’t have sufficient coverage, you could end up getting sued—and not having the insurance coverage to back you up.
How can I get multiple quotes for homeowners insurance?
If you’re wondering “how much homeowners insurance do I need?,” getting multiple quotes is a great way to compare coverage and make sure that your home is not underinsured. Contact the experts at Guaranteed Rate Insurance to get started. They have the background and experience to make sure that you have the right policy—and that you are fully covered.
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