When the headlines read of natural disasters sweeping the country or devastating fires destroying homes, it is common to question the amount of homeowners insurance we need to cover our home and possessions in the event a catastrophic event in our lives.
The amount of homeowners insurance you will need to purchase will cover the cost of the following:
1. The structure of your home
2. Your personal possessions
3. The cost of additional living expenses if you are required to live somewhere else while repairs are performed to your home.
4. Your liability to others for accidents that may happen at your home
In order to be sure you have adequate coverage, you will need to determine the value of each of these areas.
Home Structure
Keep in mind that this does not include the land that your home is on. This is because in most instances (perhaps other than earthquakes, which requires different coverage); the land will remain in place. Your home structure is the cost required to rebuild your home at the current construction costs. This means that the home structure value is not contingent upon the price you paid for your home, or what the market value is, but rather the actual cost of construction. You can talk to your local insurance agent to find building costs in your area.
Possessions
This is where a personal inventory can be very beneficial. Without a personal inventory, many policies will determine personal possessions to be 50-70% of the home value, which can be very low if you own expensive electronics, furniture and other possessions. Conduct a simple home inventory with a video camera or take photos to detail everything you own. Determine the estimated cost of replacing all of these items by recording their make/model and serial number if possible.
Living Expenses
This area of your policy is usually set by the particular policy contract you hold, but you want to check with your agent to be sure you feel that this area is adequate for local hotel or rent prices.
Liability
This is where your umbrella policy kicks in. To determine your needed liability coverage, you’ll need to consider the following formula: Take your salary, the equity in your home, your investment and the value of any additional assets. Then, subtract your debt. If the total tops $300,000, you should have an umbrella liability policy which will cover you if someone is harmed in your home and you are held liable. Generally speaking, umbrella policies of $1 million are common, and can be added to your policy with a small annual fee.
It is best to review your homeowner’s insurance policy with your local insurance agent once a year, or when your family circumstances change for any reason.
