Homes are hefty investments. We invest our life’s savings for buying a home and it is special. Thus, if something unforeseen and bad happens, it will dig a hole in our pockets. Plus it will be an emotional blow. Having appropriate insurance mitigates the blow and helps you keep the situation under control. Thus, a good question is, how much homeowners’ insurance should I have? And this article has the answer to all your questions!
Types of Homeowners’ Insurance I Should Have!
There are 4 main types of coverages offered by insurance companies.
#1: Dwelling Coverage: This covers you for rebuilding or repairing your house in case it blows up due to some reason or a cyclone hits it.
#2: Personal Property Coverage: A home is special not because of its four walls. But, because of people living in it and things they accumulate in it to call it home. This coverage will cover you if these things get stolen or are damaged due to some accidental fire or something else.
#3: Liability Coverage: Such a policy protects you if somebody gets hurt on your property. Say a tree fell over him/her (Well, God forbid, but still). In such a situation, the person that got hurt can sue you. And it can cost you all hospital expenses, death benefits, and even all your assets. So, be vary and take good liability coverage.
#4: Additional Living Expenses Coverage: Say, your house is down to zero. Now, you will have to get it rebuilt. So, where are you going to live now? This policy covers the expenses that you will incur while staying outside.
There are many other riders and additional coverages like Water Backup Coverage, Ordinances or Law Coverages, etc. that you must go for. We will discuss them also later.
How Much Homeowners’ Insurance Should I Have?
So, let’s see, how much of each type of homeowners’ insurance should I have to have a peaceful sleep.
#1: How Much Dwelling Coverage Should I Have?
A common misconception- dwelling coverage should be equivalent to your mortgage. Wrong. In the situation of a disaster, if your house is torn down, you will need the rebuilding amount to stay safe from a forthcoming financial disaster. Thus, good dwelling coverage is what you will need to rebuild at the current prevailing construction prices.
Some considerations to keep in mind are the type of coverage you must have- ACV or RCV or ERC. These three are different and depending on your situation you must choose what is best for you. ACV is when you get the rebuilding cost minus the depreciation of your property. While RCV does not take depreciation into account. It simply reimburses you for whatever is the cost of rebuilding your home.
But, if you got hit by a disaster like a cyclone. Which is in fact a high probability, you may want to be having an ERC coverage. Because rebuilding prices surge during such situations. And even an RCV would not compensate you enough. But an ERC will pay you exactly what your rebuilding will cost you.
An RCV policy will cost you about 10-15% more, and an ERC will cost you some 20-25% more, but it is every penny well worth it.
To calculate how much dwelling coverage you should have, either consult a financial advisor or your insurance agent and pay for a visit to your property. But if you just want a ‘Rough’ idea of your coverage amount, simply multiply your area in the square foot to whatever is the per square foot cost to build in your area. This can be easily consulted by your local contractor.
#2: How Much Personal Property Coverage Should I Have?
Don’t we have an emotional attachment to our belongings? Plus they have cost us a considerable amount. So, protecting them is of utmost importance.
Usually, people go for about 50-70% of their dwelling coverage as their personal property coverage. But, it is not always sufficient. For example, if you have a dwelling coverage of $3,00,000, then your personal property coverage should be about $1,50,000 to $2,10,000. But, if you have a large number of expensive items in your house, then this coverage may fall short.
Thus, you must necessarily have an inventory of your personal belongings. Many apps are available nowadays to help you do just that. Or you can simply take a video of your belongings. This will help you figure out the coverage you must have. Also, it will be a blessing when you actually need to file a claim at the time of need.
There are some things to keep in mind. First, is that coverage for certain belongings has an upper cap. Like, for jewelry it is $2,000. Thus, if you have more jewelry, then you must have a separate policy for that. The same is the case for furs, high-value artifacts, computers, etc. Secondly, personal property coverage should essentially be of RCV type. But mostly, by default, it is ACV type. So, do consider, getting it upgraded.
#3: How Much Liability Coverage Should I Have?
Since a lawsuit can suck you out of all your finances. Thus, liability coverage is a must. You can be charged for medical expenses, funeral expenses, death benefits, etc. The lawsuit can even cost you all your assets.
Thus, you must have minimum liability coverage of worth of all your assets. For example, if you have $3,00,000 of assets in your home, you should have at least that much cover.
But some of us have high-value assets in our home and our assets cross the $5,00,00 mark. If this is the case with you too, you must go for an umbrella policy or an excess liability policy. These policies do not cost you much extra money but ensure a lot of relief.
#4: Do I Need Additional Coverage?
Well, that depends on your own circumstances. If your area is flood or cyclone-prone. Then your lender may require these coverages or an altogether separate policy covering these.
You may also need policies like Water backup coverage for old homes.
When we talk about how much homeowners’ insurance should I have? Then it should not be as much as you can. It should be as much as you can ever need. Unnecessary policies can dig a hole in your pockets. But the right insurance will be a savior at the time of need.
You can also save by combining your policy with other policies like car insurance etc. Another way of reducing premium is by raising the deductible.
Lastly, do consult an insurance advisor for a good policy. It will ultimately be a saving.
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