A home may be your largest investment—make sure you adequately protect it
If you own a home, you may wonder how much homeowners insurance you really need. After all, the more coverage you have, the higher the premiums—and you probably want to avoid paying more than you need to. Still, if you don’t have enough coverage, could you afford to rebuild your home and replace your belongings if a disaster were to strike?
The good news is that you can fine-tune your homeowners insurance policy to make sure you have the right type—and right amount—of coverage.
- Homeowners insurance covers losses and damages to your home and belongings and protects your assets from any liability claims.
- Standard policies don’t cover everything, so you may need additional coverage to protect against perils such as floods and other natural disasters.
- Your insurance agent can help you decide the type and amount of coverage you need.
What Is Homeowners Insurance?
A home is likely the largest single purchase you’ll ever make, so it makes sense that you would want to protect that investment. One way to do that is to stay on top of the inevitable repairs and maintenance that keep your home in good condition. Another way is to buy a good homeowners insurance policy.
Homeowners Insurance Coverage
Each insurance policy covers certain “perils”—the mishaps you’re protected against. According to the Insurance Information Institute, some of the most common perils covered by standard homeowners policies include:
- Damage from an aircraft, car, or vehicle
- Falling objects
- Fire and smoke
- Lightning strikes
- Riots or civil commotion
- Vandalism and malicious mischief
- Volcanic eruptions
- Water damage (from within the home only)
- Weight of ice, snow, and sleet
- Windstorms and hail1
The percentage of homeowners who incorrectly believe flood damage is covered by their standard policy, according to Princeton Survey Research Associates International
While standard policies cover many different perils, they don’t cover everything, including:
- Floods. Flood insurance is specifically excluded from standard policies, so you must buy it as a separate policy. Even if you don’t live in a flood plain, you should still consider flood insurance: 90% of natural disasters in the U.S. involve some type of flooding.
- Earthquakes. Earthquake coverage is usually available as a separate policy or as an endorsement to your existing homeowner’s coverage.
- Maintenance Damage. Homeowner’s insurance doesn’t cover mold, infestation from termites and other pests, or damage due to lack of maintenance.
- Sewer Backup. Sewer backups aren’t covered by standard policies or by flood insurance. Coverage is usually available as a separate policy or as an endorsement.1
How Much Homeowners Insurance Do I Need?
According to Insurance.com, if you have a mortgage, your lender will require a minimum amount of dwelling and liability coverage. That coverage protects your investment—as well as your lender’s.
Conversely, if you don’t have a mortgage, you don’t have to buy homeowners insurance. Of course, while coverage is technically optional, it would be very risky to leave what’s probably your largest asset unprotected. Instead, a good rule of thumb is to have enough homeowner’s insurance to:
- Rebuild your home
- Replace your belongings
- Cover injuries and damages that happen on your property
- Reimburse your living expenses while you can’t live in your home
Standard homeowners insurance policies have four types of coverage that help you reach these goals: dwelling coverage, personal property coverage, liability coverage, and additional living expenses coverage.3
Recommended coverage: Equal to your home’s replacement cost
Dwelling coverage is the part of your homeowners insurance policy that helps pay to rebuild or repair your home and any attached structures—such as a garage, deck, or front porch—if they’re damaged by a covered peril.
Personal Property Coverage
Recommended coverage: enough to replace all your belongings
Personal property coverage applies to everything in your home beside the house itself—appliances, clothes, furniture, electronics, sports equipment, toys, and even the food in your fridge. The coverage kicks in if your belongings are destroyed, stolen, or vandalized.
Recommended coverage: As much as you can afford
Liability coverage is the part of your homeowners policy that kicks in if someone is hurt on your property. According to NetQuote, five common liability claims that homeowners face are:
- Dog Bites. Some dog breeds are considered high risk and aren’t covered by standard policies. Check with your insurance agent if you have a pit bull, an Akita, German shepherd, or another dog breed that could be deemed dangerous. Also check to see whether you are covered if your dog bites someone who is not on your property—at a park, for example.
- Home Accidents. You’re liable even if someone comes onto your property uninvited and gets hurt.
- Falling Trees. You may be liable if a tree on your property falls and hurts someone or damages a car or neighbor’s home.
- Intoxicated Guests. If one of your guests becomes intoxicated, you could be liable for any harm that person causes other people or property.
- Injured Domestic Workers. If you hire people to clean your house or take care of your lawn, you could be liable if they’re injured on the job.
Most homeowners insurance policies have at least $100,000 in liability coverage. It’s a good idea to bump that up to at least $300,000—or more if you can afford to do so.
Additional Living Expenses (ALE) Coverage
Recommended coverage: 10% to 30% of your dwelling coverage
If a fire or tornado destroyed your house, it could take months or even years to rebuild it. Where would you live in the meantime?
The Bottom Line
Talk with your insurance agent to find out if you have the right type—and right amount—of homeowners insurance coverage. Often it doesn’t cost nearly as much as you might expect to go from a so-so policy to excellent coverage that will keep you well-protected (and let you sleep at night).
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