YOU ASK:

How can I establish the right Homeowners coverage limits?

WE ANSWER:

Setting the right home insurance coverage amount is of great importance - otherwise, you risk ending up inadequately insured, or overpaying for insurance you may not need. This is by no means an easy task, but it doesn't have to be nerve-racking, either, especially if you follow certain tips.

How to Establish Your Homeowners Coverage in 4 Steps

Step 1 - Get an estimate of your home's replacement cost

While some policies might offer you to insure your home for its actual cash value, this might not be enough to cover all the expenses of rebuilding your home if it gets completely destroyed. This is why you need to add the replacement cost provision, instead.

You can use your mortgage appraisal, ask a builder to do a rebuilding estimate for you or get a professional independent appraisal done. Alternatively, you can rely on your insurance agent's special computer program. However, always make sure you double check the agent's calculations as they might be wrong.

Step 2 - Determine the replacement cost of your personal belongings

The items you own are as equally as valuable as your home so you need to make an inventory of your possessions and add up the replacement cost or each of them. There are a few methods you can use to help you through this process. You can ask your agent if they have access to the square footage method guide - a method insurance professionals use extensively. Alternatively, you can use the "200 percent approach": you simply need to add up the replacement costs of all your major belongings, then double the aggregate amount to cover all the smaller items you might have missed. If you have any valuable collections, add their replacement cost, too.

Step 3 - Buy the home replacement guarantee endorsement

Even if you think you have bought the right coverage, you can always risk ending up underinsured. To ensure that you will still get your home rebuilt if you need to, you can add an optional coverage called Home replacement guarantee. While a lot of insurers now put limits on this coverage, you can still find its unlimited version.

Step 4 - Set the right deductible

Another very important thing to do is determine the right deductible - ranging from $250 to $1000 or more, this is the amount you will have to pay out of your pocket in the event of a loss. Choose a deductible you feel comfortable with and remember - the higher the deductible, the lower the premium.

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