Home Insurance: How much is Enough?

Some homeowners are not clear on what amounts they are actually insured for, believing that they are sufficiently protected as long as their policy satisfies the mortgage holders. The fine print on the policy may be ignored, and many people assume they have coverage for certain things when they don’t. Not only do property owners undervalue the amount of coverage needed, they often neglect to upgrade their coverage over time, leaving themselves woefully under-insured.

In deciding how much home insurance is enough, most people use the replacement cost benchmark. They interpret this as, “If some event were to wipe my home and its contents out of existence, what would it cost to bring it all back?” This is not the same dollar figure as “What is my home worth?” 

In assessing property value, most appraisals use a generic template that does not account for individual customization's inflation, depreciation, additions, or changeable market factors. If you want to be able to bring your home and property back to an approximation of its pre-loss condition without incurring significant financial hardship, you need to be able to make an accurate assessment of your actual replacement cost.

Consider the following replacement factors:

Renovations

If you've done renovations or upgrades, don't assume your policy will still be enough to cover home replacement. It's important to do a policy upgrade every time you make changes or renovations. Also, make sure structures you have added are still included in your policy. Things like swimming pools or detached buildings may require a separate policy.

Rebuilding in current markets

If you were to lose your home to a natural disaster or fire, do you have adequate coverage to rebuild your home in today’s market?  Skyrocketing materials and construction costs can mean that the cost of rebuilding could be significantly higher than expected. Maintain a current per-square-foot estimate by a knowledgeable contractor or use an online assessment tool.

Location factors 

If you live in an area of urban renewal, your property value can change dramatically within a short time. For example, an inexpensive lakefront cabin in a remote area can quickly escalate in value when a major industrial project is built nearby.

Coverage of contents 

Many standard policies cover contents to about 70 percent of the value of the home itself. This may seem like enough on the surface, but much depends on the nature of your possessions. If you are a thrift store junkie and buy your furniture second-hand, your overall content value will be very different than if you have gradually accumulated priceless antiques and designer clothing over the years. If you have valuable gems or art, an upgrade is essential.

Undervaluing contents

It is very easy to undervalue what you own. Large items such as furniture, appliances or computers are straightforward. But you may be surprised at how quickly content value escalates when you think about replacing clothing, books, utensils, computer software, tools, musical equipment, children’s items, etc. Replacing your child’s extensive Lego collection, for example, could really add up. Maintain a comprehensive inventory of your possessions, using photos, videos, or online tools.

If you aren't sure what your coverage entails, don’t make assumptions. Talk to your insurance agent. Some companies provide automatic inflation updates, while others leave the onus on you to upgrade your policy. Do a thorough inventory to determine whether extra coverage makes sense. Consider what it would cost to replace all your possessions. Could you manage it financially if your policy only covers 70 percent? If not, then it is false economy to not purchase extra coverage. 

Talk with your insurer about ways to reduce risk while maintaining affordable premiums.

Know your policy, and protect your investment by staying alert to changes in the marketplace or environment that might impact the value of your home and property. It is estimated that over 2 out of 3 American homes are undervalued by as much as 20 percent. You may not be able to prevent a disaster from happening, but you can minimize your risk of major financial loss by making sure you have enough insurance to protect both your home and your possessions.

Give us a call at (817) 626-3339 to get a free Fort Worth home insurance quote.