How much Homeowners Insurance do I need?
Homeowners insurane is a popular subject! Your mortgage company will require you to pay for 12 months of insurance at closing. This upfront cost can cause many people to invest in the bare minimum. Some banks only require you to buy homeowners insurance to cover the amount of your mortgage. This could be a mistake. Before you try to pinch pennies on homeowners insurance consider all that it covers.
The Structure
You certainly need enough insurance to cover the cost of rebuilding your home at current construction costs. This is the bare minimum. When you calculate the cost of rebuilding, don’t include the cost of the land and don't base your rebuilding costs on the price you paid for your home. The cost of rebuilding is probably going to be more than the price you paid. If you factor todays rebuilding costs plus your down payment amount insurance that only covers your mortgage amount will fall woefully short of what you will need.
For a good estimate of rebuilding costs ask Garrett. A rough estimate is to multiply the total square footage of your home by local building costs per square foot. To find out local building costs in your area, call your agent or ask Garrett. There are many factors involved in the price per square foot. Just a few are:
- The type of exterior wall construction–frame, masonry (brick or stone) or veneer
- Was the house custom built
- The style of the house (ranch, colonial)
- The number of bathrooms
- The type of roof
- Quality of cabinets and molding
- Fireplaces, exterior trim and other special features like arched windows
- Trees can be a big factor, especially with winther storms. We have a great Tree Service in Louisville, by the way.
Two important notes: standard homeowners insurance policies provide coverage for disasters like fire, lightning, hail, wind, ice and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance. If you are buying an older home, you may not be able to purchase a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls, hardwood floors and large crown molding, the policy will pay for repairs using the standard building materials and construction techniques in use today.
Your Personal Possessions
Most homeowners insurance policies provide coverage for your personal possessions for between 50 percent and 70 percent of the amount of insurance you have on your home. So, for example if you have a $300,000 policy, your possessions will be covered between $150,000 and $210,000.
This may sound like a lot but it is not. You need to conduct a home inventory. This is a detailed list of everything you own and the approximate cost to replace these items if they were stolen or destroyed. A cash policy will pay you for the value at the time the items were destroyed. Replacement value covers actually replacing the items as new. Garrett can provide a worksheet and guidelines for you to follow.
Additional Living Expenses After a Disaster
This is an often overlooked feature of a standard homeowners insurance policy. This pays the costs of temporarily living away from your home. Living expenses covers hotel bills, restaurant meals, kennels and other living expenses incurred while your home is being rebuilt. Again, coverage for additional living expenses differs from company to company, that is why you need someone to guide you through the pitfalls. Most policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides unlimited coverage for a limited amount of time.
Liability to Others
This part of your policy covers you against lawsuits for bodily injury or property damage that you, your family members or your pets cause to other people. It pays for the cost of an attorney and for any damages you must pay. Generally, most homeowner’s insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Experts recommend that homeowners consider purchasing at least $300,000 but closer to $500,000 worth of coverage of liability protection.
A good idea is to purchase an Umbrella policy. They start to pay after you have used up the liability insurance. An umbrella policy is not part of your homeowner’s policy; you have to purchase it separately. But, you may get a discount on your homeowners if you also purchase an umbrella policy so the cost of the additional insurance is usually negligible.
