Insurance can be tricky. We know we should have it, but how much coverage do we need? Figuring that out can be especially hard with homeowners or renters insurance, which must cover not only the property itself, but also related belongings and more.
“Both [homeowners and renters insurance] provide liability protection including medical expense payments if someone is injured or hurt on your property,” says Frank N. Darras, an attorney from Ontario, Calif., who specializes in insurance issues. “Both protect your personal property, even if your personal belongings are not inside your house or apartment when damaged, destroyed, or stolen. Both also protect you if the house or apartment is damaged and you need to relocate while repairs are made.” (That's one of many insurance lessons Brent Mondel learned when her house was ravaged by Hurricane Irene.)
When you're figuring out how much homeowners coverage to buy, here are some questions to ask yourself:
How much is my mortgage? “Your lender will require you to carry 80% of the property's value or insure the home to 100% of the mortgage,” Darras says. “Be sure if your home is older that you take into consideration inflation costs since you purchased. If you added an addition, remodeled, or finished your basement, make sure you have added these upgrades to your calculations. Buy guaranteed replacement coverage so if the property is damaged or destroyed, the carrier must repair or rebuild the home to the value it was before the loss.”
How much would it cost me to replace or rebuild my property? Don’t make the mistake of assuming that a drop in your property value means you can cut back on coverage. “A surprising number of homeowners don’t realize that insurance values should be based on replacement costs – what it would take to rebuild what you had,” says Jerry Hourihan, senior vice president for the Private Client Group division of Chartis, a global property casualty insurer. “Despite a dip in market values, materials and workmanship costs for custom properties have held strong relative to real estate values.”
Do I need additional coverage for special circumstances? “Read the fine print of your policy. All policies include particular caps or other restrictions that could impact what happens at claim time,” Hourihan says. “For example, homeowners’ policies place coverage limitations on water damage or certain contents inside your home, such as jewelry. Other items, like coverage for flooding or sewer back-up, may be excluded entirely. Carefully reviewing what is and is not covered will help you determine if a rider or additional policies need to be purchased for more complete protection.”
Have there been any changes to my home or lifestyle since I last renewed my policy? Experts say the top insurance mistake is being underinsured, which often happens because consumers fail to update their coverage as their property or needs change. “Many people buy insurance based on values that are vastly underestimated,” says Hourihan. “If extensive home improvements and renovations aren’t factored into your policy, you could be exposed to hefty out-of-pocket costs in the event of a claim. Also, take time to reflect on any activities that could impact the level of risk you face. For example, if you like to entertain at home, you may want to increase your liability coverage and purchase a separate umbrella policy on top of that.”
How much is my stuff worth? “Most people haven't really taken the time to inventory their personal possessions and don't have enough personal property insurance,” says Darras. “Many folks are shocked when they do have a loss and discover that their jewelry, silver, guns, rugs, furs, or family heirlooms should have been insured under a floater policy and their losses are capped at $500 or $1,000.”
If you are renting, don’t rely on the property owner’s insurance. Remember, that’s designed to cover the property itself, not the stuff you own inside of it. “Renters insurance is ‘must have’ coverage, especially if you are downsizing,” says Darras. “Your furniture, rugs, heirlooms, silver, electronics, and all that stuff you have in storage, along with the bikes and tools in the garage, your DVD collection—it all adds up to expensive items to replace. Make sure you videotape your possessions once a year by going room by room, drawer by drawer, closet by closet so you have an inventory, if disaster strikes.”
Hourihan offers two more tips for getting the best deal on home insurance and making sure you have sufficient coverage:
Buy in bulk. Personal property and liability insurance is one area where it’s good to have all your eggs in one basket. Purchasing multiple policies (home, auto, umbrella, etc.) from the same carrier often offers better pricing and access to premium credits.
Work with an expert. Many people unwittingly outgrow their coverage as they achieve career success. As a result, they can be severely underprotected. By working with an independent insurance agent/broker, you can be sure your unique personal risk management needs are addressed.