If you’re in the process of buying a home, one of the most important factors to consider is how much homeowner’s insurance you’ll need for your property. If you purchase too much, you might end up spending cash on the coverage you’ll never use.
Meanwhile, if you buy too little, your insurance might not cover the costs to fix the damage if a natural disaster happens to strike your home. Here is some insight into how you know if you’re getting the proper amount and type of insurance to suit your circumstances.
How much home insurance do I need?
When purchasing a homeowner’s insurance policy, you’ll want to make sure you’re not only covered for minor damage that you’d like financial help fixing, but also in case your home is completely destroyed (in a fire or other natural disaster) and needs to be rebuilt from scratch.
This is known as “actual total loss” or “total loss.” Total loss coverage basically is an estimate of how much it would cost to rebuild your home. While it could cost more (or less) than you paid for your house, it largely depends on construction costs in your area.
To determine the total loss coverage for your property, talk to a home insurance company or agent to help you decide the best amount of coverage based on your home’s square footage, the local construction market and current market value of your house. If you have a mortgage on your home, your lender might require your coverage to equal 100 percent of the replacement cost of the home.
Even if your home is paid off—or no requirement is in place—it still is a good idea to buy enough coverage to cover the complete replacement cost. Although you’ll hopefully never need to use it, the peace of mind it can provide in the event of a disaster is priceless.
Does home insurance cover what’s inside the house?
You not only should think about the replacement cost of your house, but also all of your belongings. Most policies will cover interior items, but that doesn’t mean everything inside your home is safe.
For example, a “named perils policy” usually covers only a narrow list of causes of loss, and depending on why you place the claim, you may find your insurance company won’t pay.
To ensure that your valuables are fully protected, look for an insurance provider that offers an “open perils” (or “all-risk”) policy. Open perils policies provide the strongest protection, because they cover all of the possible causes of loss, except for those that are specifically excluded.
Is basic home insurance enough?
When shopping round for home insurance and comparing quotes, be aware that most insurance providers will give you several quotes rather than just one. This is because companies often offer different levels of insurance, such as “basic” and “enhanced,” and each has its own price, pros and cons. Here are some factors to consider:
• Deductible. This is the amount you’ll need to pay out of pocket before your insurance pays. Typically, the higher the deductible, the less expensive the monthly insurance premiums. Why? Because with a high deductible, you’ll have to pay more before your insurance company has to pitch in. Deductibles can range from $1,000 up to $5,000.
- Coverage limits. This is the maximum amount your insurer will pay when something goes wrong and you file a claim. You’ll have to pay out of pocket for everything above this amount.
A more affordable, basic plan might pay the medical bills if a guest is injured at your house at up to $1,000 per person, for example, whereas a more expensive, enhanced plan might cover up to $5,000 per person.
Choose between these various insurance levels based on your personal comfort level, tolerance for risk, and how much money you have in the bank in case of emergencies. Keep in mind that most companies will let you increase or decrease your coverage if your circumstances change.
Do you need additional home insurance riders?
Your insurer likely will offer you some additional, optional coverage if you have high-end items like expensive jewelry or artwork in your home. You’ll pay more upfront, but if your valuables are damaged or destroyed, your insurance company will help you pay to replace them, and that could save you money in the long run.
You also might need to purchase a separate insurance policy for things like floods and earthquakes that aren’t covered in basic insurance plans.