Dwelling

Determining the amount of property coverage needed on a home is one of the more difficult decisions to make. A homeowner needs to understand the difference between the market value of a home, which is what it can be sold for, the assessed value, which is what taxes are paid on, and the replacement cost, which is the amount it would cost to rebuild your home. At the same time, none of these have anything to do with the purchase price, mortgage amount or value of the land.

It is wise to insure your home for at least 80% of its replacement value; in fact many insurers will require this. That’s why it is important to review your coverage needs regularly with your insurance company or agent to ensure that you have an adequate amount of coverage to pay for a financial loss if your home is destroyed. Some things to take into consideration during this regular review are whether your home has appreciated in value, whether construction costs have risen in your area and whether you made any major additions or improvements in your home or property since the last time your coverage limit was set.

Another decision that you will need to make is what type of coverage you need. The most commonly selected coverage is replacement cost coverage. Replacement cost coverage pays for rebuilding, repairing or replacing the home with similar kind and quality of materials, without a deduction for depreciation. Depreciation is the decrease in home or property value due to age or wear & tear. Actual cash value is the amount it would cost to repair or replace your damage to your home or property, after a deduction is made for depreciation. Actual cash value is the standard coverage level for personal property, which we will discuss a little later.

Even if you have selected replacement cost coverage, if the cost to replace the damage to your home is greater than the coverage limit you have selected, the most you will receive is the coverage limit. Many companies offer policy upgrades, usually at an additional cost, that factor in inflation and automatically increase the amount of coverage on the home each year. It is still important to review the actual replacement costs, as such adjustments might not keep up with the increasing value of homes or repair costs in your area.

Personal Property

The coverage limit for personal property is usually 50% of the limit that is selected for the coverage on the home. Your personal property is covered at its actual cash value. That means, if your 5 year old TV is destroyed by lightning and its average life is 10 years, it has depreciated in value by 50%. Your original purchase price may have been $500, but you will only receive $250 to repair or replace the TV. Also, if you have not already paid your deductible, that will reduce the claim settlement. Accordingly, it is important to consider whether you would like to upgrade the personal property coverage to replacement cost coverage, again at an additional cost.

Some types of personal property are subject to special lower limits of coverage; for example money, stamp and coin collections, firearms, jewelry and furs. For an additional charge, these items and others can be listed or scheduled and insured at a specified value.

Personal Liability

Unlike auto insurance, there are no laws requiring specific minimum limits for the liability coverage. A homeowner should have enough coverage to protect themselves from financial loss due to lawsuits for bodily injury to others or for damage to others property that may be caused by the homeowner or the homeowners family. This need can vary and change. For example, as the homeowner accumulates assets, the need for coverage to protect those assets may increase. Eventually, a homeowner may want to consider an umbrella liability policy to provide liability coverage limits in excess of those provided in both the homeowners and auto insurance policies. Again, working with your insurance company representative or agent to review these coverage needs is recommended.