How much home insurance do I actually need? Why is Broker A insuring me to $150,000 while Broker B is insuring me to $275,000? Which one is correct?
These are daily questions I receive from prospective clients of my NY agency. The quest to finding the proper limit of home insurance may seem like quite the puzzle at times. However, the reality of the situation is it’s quite simple to determine the proper value of your home insurance. Please review this expert advice to gain some helpful insight that will be useful in your journey to finding proper home protection.
A simple formula to ensure your house is carrying proper limits of insurance is to multiply the total square footage of your home by the construction cost typical for your region. For example, I am a NY based broker, so I know the standard cost of construction for the average home ranges from $150-$200 per square foot. If I am going to do a quote for a 1,500 square foot house, I am going to start my quote at $300,000 for the Dwelling Limit.
To go along with the same tone as the first “Do,” it is important to accurately know the dimensions of your home to determine the square footage. The insurance broker should do this as part of their underwriting effort. (Some brokers take the time to research the underwriting information, while others cut corners.) A diligent homeowner should always double check the information being used in the underwriting of their policy, so they know their protection is correct.
Homeowner’s policies can be written one of two ways: They can be written on Replacement Cost, or Actual Cash Value. The only difference is how depreciation is factored in. Replacement Cost does not deduct depreciation from your claims check while Actual Cash Value does. For example, a couch is stolen from your home while you’re on vacation. The couch was purchased 10 years ago for $5,000. The depreciation on the couch is $2,500. A Replacement Cost policy will pay you $5,000; an Actual Cash Value policy will pay you $2,500. While you have to pay more for Replacement Cost, it is definitely worth its weight in gold when it comes down to a claim payment.
Another helpful tool that tells you if you have the home insurance you need is the inspection report. In NY, once a new home is given to an insurance carrier, the first thing they do is order an inspection. The inspection double checks the work of the broker to make sure the home is properly covered and in good condition. The broker receives a copy of the inspection report which shows if coverage needs to be adjusted and if any corrections need to be made to the property. Review the inspection yourself, after your policy is active on your home, to confirm whether or not your policy is sufficient, or needs adjusting.
I understand the sentiment of saving money on your insurance. Every client wants to increase coverage and decrease cost. It is my goal to try and attain that for each and every person that contacts my agency. That being said, absolutely do not lower your limits for the pure reason of saving money. If you lower your dwelling limit from $450,000 to $400,000 you may save yourself $100. Think of how meaningful that $100 savings will be in the case of a total loss to your home where you will now need to come up with $50,000 to properly reconstruct your house. It would take you about 40 years of monthly insurance payments to save $50,000 after lowering your dwelling limit, and it can only take one day for you to owe that same amount in the event of a total loss of your home.
The definition of market value is the price at which you can sell an asset. To show this point, here is an example: I insure a 800 square foot beach bungalow in Long Beach, NY. The market value of this bungalow is $450,000 due to it’s beautiful location by the water. Since it is only 800 square feet to rebuild in the case of a total loss, the property is insured for $160,000. Always remember that there is a stark difference between market cost and replacement cost.
While we have been primarily discussing the limits of covering your dwelling itself, please, remember to carry proper liability limits. The liability portion of your home insurance protects you from lawsuits brought about by third parties that injure themselves on your property. Liability claims can become very costly, so make sure you are carrying the maximum liability limits your carrier offers on your home policy, which is usually $500,000 or $1,000,000.
While I realize some people only carry home insurance because it’s a requirement of their mortgage bank, this should not be the primary factor behind obtaining coverage. If your house will cost $500,000 to rebuild, you should insure it for $500,000 regardless of the money left on your mortgage. Mortgage banks are looking to protect their interest with their insurance requirements. At the end of the day, they do not care what happens after a loss as long as their loan is paid off. Make sure you are carrying insurance to protect your own, most-valued asset--not the mortgage banks interest in it.
As you can see, deciding what value to insure your home for is very important. Following the advice above will aid you on your journey to perfect home insurance protection. While I hope you find an affordable rate for your home insurance, make sure you are putting protection over price when making your decision. Many insurance brokers offer a free consultation to confirm if your home insurance coverage is exactly what you need, so be sure to ask for one.
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