Your home is often the most valuable thing you own; not only for sentimental reasons, but just for the sheer dollar amount.  I am guessing that while the vast majority of you have homeowners insurance, people often do not know or understand the coverage they have.  In some cases, this can be costly if a claim is made later.  Here are a few things to review in your homeowners’ policy that are common points of confusion.

Replacement cost

In the event the worst imaginable event happens and your home is destroyed in a fire or other natural disaster, your homeowners insurance has a set amount of money allotted to rebuild the home.  You want to make sure this amount is adequate to build a brand new house for you. 

One idea that confuses many people is that they think this is the value of the home.  What the policy covers is the cost of building you a new home, which most of the time is more than the home is actually worth.  This is because it costs money to clean up debris and wreckage.  Plus, a “custom” home is usually built whereas when the home was a new construction build, it was part of a package of similar models.

This number is important to get right because it is estimated that two out of three homes are underinsured[i].  If the worst happens, you could be paying tens, if not hundreds of thousands of dollars – out of pocket.  Home construction prices vary by region, but click here for a website that may help you calculate this.

Roof Replacement

In 2018, the most common type of claim (about 1 in 42 homes), was related to wind and hail damage[ii].  To save money, more and more insurance companies are changing the coverage for roofs from replacement to actual cash value.  What this does is take depreciation of the roof when determining the amount of money they will give you for a new roof.

For example, let’s say you paid $10,000 to get a new roof ten years ago and it has a twenty year life expectancy.  If you had hail damage on your roof today and needed a replacement, the insurance company would give you $5,000 to help replace your roof if you had actual cash value policy coverage.  That is what they would consider the roof is worth – given that it is 10 years old. 

Check with your insurance company to make sure your policy has the coverage on your roof that you want.

Liability

Unfortunately, accidents may happen on your property and you can be held liable for them.  This coverage matters because if you are sued for anything that happens on your property, the insurance company will only pay up to the level of your liability coverage.  What most people don’t realize is that this also includes “personal injury.”  What this means is that you can be covered if someone sues you for slander, libel, or anything you may do to harm them. 

Make sure that your policy coverage is adequate and if you have significant assets, you might want to consider purchasing an umbrella policy.  This policy gives protection above and beyond your homeowners and auto liability coverages.  It is usually relatively inexpensive and most insurance companies are more than happy to extend this coverage to you.

These are just a few areas to look out for.  It isn’t a bad idea to review the policy once a year just to see if everything is in line.  It may just end up saving you a lot of money.

[i] https://www.insurance.com/is-my-house-underinsured-how-to-fix

[ii] https://youngalfred.com/blog/most-common-homeowners-insurance-claims-cost-and-frequency