If you own a home in the U.S., chances are you have homeowners' insurance coverage—either because it was required by your mortgage lender or because you wanted the security of knowing that many types of home-related damage, disasters, or personal liability if someone gets injured on your property, will be financially covered.
Yet, one commonly hears that most Americans are underinsured. In other words, if a catastrophe or a major national disaster hits, their insurance policy may not provide enough compensation to rebuild the house to anything near what it was. Yet the insurance might not provide for options other than rebuilding; in other words, you likely won't be able to take cash and walk away, or at least not for as much as you would have received if rebuilding.
What's more, the insurance might not cover the true value of your personal property, which is a separate line item within your policy.
How do you know whether you do, in fact, have enough insurance on your home? Here are some ways to evaluate that.
Remember when you first lined up your homeowners' insurance? You probably had a long conversation or contact with an insurance company representative, discussing what features were in your home and property at that time, and therefore what might ultimately need to be rebuilt. A representative may have even personally visited the home.
Such discussions are the normal procedure when purchasing the standard "replacement cost" policy. Insurance coverage today almost never offers a blank check for repairs, but rather the amount of money your carrier estimates it would take to repair, replace, or rebuild the your home's structure using similar materials and products, taking into account historical or special features and luxury items, and bringing it up to current building codes.
You probably talked with the insurance rep about flooring, roofing, cabinet, wainscoting, and other materials. If you were feeling strapped for cash, you might have fallen prey to an urge to underestimate the quality of these materials.
Your insurance premium would have ultimately been based on the replacement cost figure that your carrier arrived at. (This could have been well below the market value of your property, by the way, which is unrelated to the rebuilding cost.)
Therefore, step one in figuring out whether you're underinsured is to double check that your insurance carrier actually has accurate information on your home and property, most likely by scheduling another conversation with the representative. While you're at it, check that the basic information on file is accurate, such as square footage.
And if you've made home improvements since the purchase, that's definitely something to tell your rep about. For example, if you turned a garage into a studio with electricity and plumbing, you'll want to make sure that you'll be receive enough in insurance proceeds to rebuild something more than a basic garage there.
Your insurer has programs and algorithms to calculate your home's replacement cost, but do these truly reflect market realities in your area? It might be worth getting an outside opinion or two from a home contractor. You'll probably need to pay for anything other than a back-of-the envelope evaluation.
Also talk to any fellow homeowners in your area who have gone through a major rebuild about what expenses they faced and where their insurance fell short.
If you discover a large disparity between what you're finding out in your own research and what you're currently covered for, get back in touch with your insurance representative.
Unlike the home itself, the limit on coverage of your personal property was probably done without much research. Your representative probably picked a number that was a percentage of your limit on rebuilding the home, which may have sounded like plenty to you. But it might not be, if your home is full of valuable appliances, sports and hobby equipment, wine, and personal items such as clothing, jewelry, and so on.
One way to figure out whether you're underinsured for personal property is to literally take stock of what's in your home, then add up how much it's worth. Many online spreadsheets and apps are available to help with the inventory process. (And in the event of a loss, having created this inventory will help greatly with making your insurance claim.)
An insurance policy is a bit of a combo platter. It sometimes includes riders for unusual property or activities, such as expensive jewelry or a home business. And it sometimes leaving out various hazards, such as earthquakes or floods, thus potentially necessitating that homeowners buy separate coverage for these.
Take another look at the terms of your policy, then consider what it leaves out. Floods are particularly worth a second look. Even if you are not in a known flood zone, sudden rushes of water can happen, and create huge damage.
After a conversation with your insurance representative, you may find that adding on coverage costs less than you expected. And while you're at it, see whether you qualify for any new discounts, such as if you're reached age 55 or added a home security system.
