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How To Determine How Much Homeowners Insurance You Need

How To Determine The Right Amount Of Insurance On Your Home And Other Structures

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Step 1. Determine the market value of your home and other structures on your property.

No matter how much or how little your house or apartment cost, the amount of the loss if your home is destroyed is the current market value. You want to at least start with this number.

Standard advice is to exclude the value of the land which presumably will not be destroyed.

One way to get an idea of market value is through websites such as www.zillow.com offsite link and www.housevalues.com offsite link. Keep in mind that the results include the land. The numbers are only a guide and not to be relied upon - particularly if your house is at the high or low end of the market. However, the results will give you a general idea.

Step 2. If you would want to rebuild your home, determine the current cost. Be sure to include the cost of meeting current code requirements.

Homeowners policies are generally written on a replacement cost basis. This means that if your home is damaged, the insurance company will pay you enough money to replace the damaged or destroyed structure without deducting depreciation. An actual cash value (ACV) policy takes depreciation into account and will probably not provide enough money to replace your home.

To determine your home's replacement value, ask your insurance company to inspect your home and give you an evaluation. If it won't, your broker has a replacement-cost guide. If your home was custom-built, obtain an independent appraisal.

Determine the replacement value of your house every year by seeing what comparable houses (homes of similar square footage) in your area have recently cost to build.

The land on which your house is located should not be included in your valuation. The land will be there even after a loss.

Step 3. Consider the co-insurance requirement (the percentage of insurance you are required to carry to be paid for 100% of your loss.)

To receive full reimbursement of a claim (less the deductible), you need to carry insurance in an amount equal to at least 80% of the total value of your property. You could consider an even greater percentage to protect against a total loss. For example, if your home burned down completely, you might need more than 80% of its replacement value to rebuild.

Step 4. Purchase an amount of homeowners insurance that at least satisfies the co-insurance requirement and preferably gives you enough money to replace your residence.

Step 5. If you have other structures on the property, also evaluate the cost of replacing them.

Standard Homeowners policies automatically provide coverage to your garage and other unattached structures on your premises in an amount equal to 10% of the amount on your house. You can increase the amount on these other buildings if necessary. For example, if your house would cost $100,000 to rebuild and your garage alone would cost $20,000 to rebuild, since $20,000 is 20% of $100,000, 20% "other structures" coverage might be better for you.

Coping with inflation: In most states, you can purchase an Inflation Guard Endorsement -- an addition to your policy that increases your coverage periodically to match rising real estate values and construction costs.

Even if you have this endorsement, review the value of your property periodically to be sure you are appropriately insured. The numbers built into the policy may not reflect the reality of your house. If you have a question about whether your policy has kept pace with the replacement value of your home, ask your broker. If he or she tells you it has kept pace, get the opinion in writing. It will help you in any arguments with your insurance company.

You may also be able to purchase "extended replacement cost" coverage. This coverage provides a stated amount to rebuild your home plus a buffer -- anywhere from 20 to 80% above the amount of the policy. For example, if your house is insured for $200,000, the extended replacement cost provision could provide an additional $40,000 to $160,000 to cover the cost of replacement.uilding Codes: You can protect against the cost of meeting changes in building codes with a "code and contention" endorsement. The endorsement provides coverage for the cost of rebuilding according to the current code at the time of your loss -- which may be far more expensive than just rebuilding a house. For older homes, this could be particularly important.

Building Codes You can protect against the cost of meeting changes in building codes with a "code and contention" endorsement. The endorsement provides coverage for the cost of rebuilding according to the current code at the time of your loss-which may be far more expensive than just rebuilding a house. For older homes, this could be particualrily important.

If you live in an area that is prone to earthquakes, consider buying enough insurance to include covering your house's foundation. Foundations which are usually not subject to damage can be destroyed in an earthquake.

Loss of Use: Look at the amount of coverage provided by Homeowners policies for the costs you would incur if you can't live in your home.

Ideally it is preferable to have the highest level of protection because the time you are away from the home while it is being repaired could be lengthy -- particularly if the loss to your property is only one loss in a geographic area which suffers a lot of losses.


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