Why Your Home Might Be Dangerously Underinsured
Find out before disaster strikes if your home and possessions are adequately covered
If you own a home, you most likely have a homeowners insurance policy. But do you know if you have enough coverage or the right kind? If there’s a flood or earthquake, for example, you’ll need additional coverage to be able to file a claim for damages.
Homeowners can find themselves underinsured and never realize it until disaster strikes. Here are three ways to protect yourself.
1. Check the coverage limits on your policy. A homeowners policy should provide enough money to replace your home if it is totally destroyed. The payout amount depends on the cost of rebuilding in your area and could be different from what you paid for your home or what you could sell it for now. The value of the land your home sits on is not included because it is unlikely to be destroyed.
To make sure you’re covered, ask your insurance agent or a local real estate broker for an estimate of what it would cost to rebuild where you live, then check whether your coverage is sufficient. If you have a guaranteed replacement cost policy, it should pay to rebuild your home as it existed before disaster struck, according to the Insurance Information Institute (III), an industry-sponsored organization. However, that “guarantee” might not cover any additional costs if building codes have changed in your area since your home was built. For that, you might also need an ordinance or law endorsement, which would cover the cost of making the structure compliant with current building codes, the III says.
2. Know what’s not covered. A basic homeowners policy will generally cover your home for fire, hail, lightning, explosions and theft, according to the III. It won’t cover damage caused by earthquakes or flooding.
If you live in an area where earthquakes are a possibility — and according to the National Association for Insurance Commissioners, 90 percent of Americans do — ask your insurance agent about an earthquake endorsement. If you live in California, note that it has state-specific earthquake insurance managed by the California Earthquake Authority.
If your home is in danger of flooding, you’ll want to consider buying separate flood insurance. You don’t have to live on, or even near, the water to be at risk. In fact, says Loretta L. Worters, vice president of the III, 25 percent of all flood losses occur in “low risk” areas. For example, a big snowfall can cause flooding that won’t be covered by a regular homeowners policy.
Flood policies are offered by the U.S. government’s National Flood Insurance Program (NFIP) and sold through many private insurance agents. According to the NFIP, a policy can cost as little as $129 a year, and the average policy costs about $650. There is generally a 30-day delay before coverage takes effect.
3. Consider your possessions. A homeowners policy typically covers the contents of your home, up to certain limits. For example, if your home is insured for $200,000, your possessions might be covered up to $100,000.
Check whether your policy covers you for the replacement cost of your possessions or their depreciated cost. A five-year-old sofa, for example, might only be covered for what it is currently worth, not what you’d pay to buy a new one.
Your policy also may impose limits on certain categories of possessions, such as antiques, art, computers, jewelry and silverware. For example, Worters says, the limit on jewelry is typically $1,000 to $2,000. So if you have items of significant value, ask about adding a floater or a rider to your policy to cover them.