When shopping for homeowner’s insurance, you might believe that your biggest decisions will be choosing a deductible and deciding upon the most competitive premium available. Since the point of homeowner’s insurance is to protect your home, you might believe that protection is roughly equal among all carriers.
But that would be a mistake. In reality, you can purchase different amounts of homeowner’s insurance, and many people are making a potentially costly mistake: They are under-insuring their homes!
Some homeowners choose to insure only the amount of their outstanding mortgage debt. The thinking is that if something happens to the home, at least the mortgage will be covered. But in this case, you would lose all of the equity you have invested into the home, if something happened to it.
Another way to under-insure your home is to purchase an insurance policy in the amount of the home’s current value. But because construction costs fluctuate (often increasing by the year), your home is not adequately protected. In the event of a total loss, your insurance payout wouldn’t recover rebuilding the home.
So how do you ensure that your home is adequately protected by your homeowner’s insurance policy? First, calculate the cost of rebuilding your home. Remember to also add in the cost of any upgrades you would prefer, such as custom woodworking, cabinetry, flooring or lighting. Compare this figure to your current amount of coverage. If you purchased your homeowner’s insurance policy years ago, there is a good chance that it won’t cover the cost of rebuilding your home.
If you want to protect yourself against rising construction costs, you might consider a policy that offers extended replacement coverage. This means that your insurer will pay up to 125 percent of your policy limit to rebuild your home. Another option is guaranteed replacement coverage, in which your insurer pays to rebuild your home no matter what the cost.
And of course, make sure that your contents coverage will actually cover all of your furniture, personal possessions, electronic equipment, artwork, and consider extra contents coverage for items like priceless art, jewelry, or firearms collections.