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How Do I Know if I Have Enough Homeowners Coverage?

Homeowners insurance usually covers several major classes of liability. In general though, the two most important categories are coverages pertaining to property (dwelling, other structures and personal possessions) and personal injury or medical payments.

Determining how much real and personal property insurance is relatively straightforward, but not quite as simple as many people think. Most people look to the prices at which homes around them are selling for to determine the value of the home. However, it is important to know that you aren’t purchasing insurance for the value of your home, but rather for the replacement cost of your home.

In general, the major difference between the market value of your home and the replacement cost is the value of the land upon which the home is built. Normally, land itself is not subject to damage or destruction and so is not carried on standard insurance policies. The dwellings and personal property are however, which is why they require protection. Therefore, in order to determine the right level of homeowners insurance that is right for you, and to find the best homeowners insurance rates, you will need to understand how much it will cost in order for you to replace your property (real and personal).

Real property pertains to the dwelling and other structures, while personal property pertains to your personal items (furniture, clothes, etc.). While you may think that the cost of constructing a new home (and garage, etc.) may be relatively static, there are a number of factors to take into consideration. There are two principal costs that factor into home construction, material and labor. The cost of replacing your home will depend on the cost of both of these items. As you would expect, these costs vary as home construction in your area fluctuates. The more homes being built, in general the higher the cost of labor, services and materials.

The other major variable in home construction cost is inflation. You may have determined the cost of replacing your home a couple of years ago, but inflation (or deflation for that matter) may have altered the costs. If you fail to factor inflation into your calculation, you may end up with too little (or too much) homeowners insurance. You can get a feeling for the costs to rebuild your property by speaking with someone involved in the home industry, be it a realtor, general contractor or yes, your insurance agent. A home insurance quote can help to give you a sense for the costs associated with varying levels of coverage.

Real property on the other hand is also subject to replacement cost, though many policies also factor in depreciation. You won’t be reimbursed the cost to buy a new couch for the ten-year-old couch that you lost from a fire. Start by factoring in the new item cost, then discount the value of your possessions using a factor that is based on their estimated useful lives. Clothes are usually have a couple year life, furniture may have a ten-year-life, etc. Generally, there are limits on liquid assets (such as cash and jewelry) unless specific riders are purchased.

It is also important to take an inventory of the items in your possession, as this serves as a record when it comes time to file a claim. Add up the discounted value of your possessions, factor in a low level of inflation and you will arrive at an estimated liability level. Adjusting this amount annually by an inflation rate (the federal government publishes a Consumer Price Index that can be used to estimate inflation) and you have a good estimate of the amount of coverage you need for personal property.

On the personal injury side of the equation determining the right level of coverage is a bit more complicated. This essentially comes down to risk tolerance and personal activities. Do you have a swimming pool? Do you throw lots of parties? Both can increase the likelihood of an accident on your property involving a personal injury. In addition to assessing the risk of a claim, you should also assess what your risk tolerance is.

Only you can decide how much risk you are willing to assume and how much you want to insure. Most people consider what they have to lose should a worst case situation happen (a major accident). Are you looking for coverage for general accidents, or do you need that peace of mind that comes with knowing you are covered no matter what? Once you’ve got a good idea at what level of personal injury liability you need to master peace of mind, compare insurance quotes to determine which provider can offer you the lowest cost insurance policy. Be sure to assess annually to make sure you continue to receive the most affordable homeowners insurance rates possible.


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