Oftentimes when a homeowner is shopping for homeowners insurance they are looking to get the best rate available which, especially in this economy, is understandable. However, policyholders should be careful not to settle for a lower rate at the expense of being inadequately insured.
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A homeowners insurance agent will typically make recommendations on coverage while a homeowner may think they should opt for less to save money. So when it comes down to it, how much homeowners insurance do you really need to protect your investment in your home? While the answer will vary from one scenario to the next, here are a few things to consider:
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Dwelling Coverage is the portion of a homeowners insurance policy that protects the actual structure of a homeowner's home in the event of a covered peril. For example, if a fire damages an insured home, the dwelling coverage portion of the homeowners insurance policy would pay out for the repairs. However, there are limits stated on each policy for how much the insurance company is required to pay in the event of a total loss of a home. These limits must be equal to the current replacement cost of the home in order for a homeowner to be adequately insured. This means that if a home was completely lost in a covered peril (for example a fire) and needed to be rebuilt from the ground up, the home must be insured for the full value to replace the home in its entirety. If the cost to replace the home is higher than what the home is insured for- the homeowner will be stuck with the additional cost.
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This is when it is important to consider purchasing a policy with guaranteed replacement cost coverage. This guarantees that as long as a home is insured up to full value when a policy is purchased, the insurance company will pay the full value to replace the home even if the dwelling coverage limit is lower than the replacement cost at the time of a total loss. Most standard HO3 policies include guaranteed replacement cost coverage otherwise a homeowner can add it for an additional premium as an endorsement.
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Contents coverage protects personal possessions inside of the home against covered perils and includes things like furniture, clothing, electronics and other items. Typically this coverage limit is provided as a percentage of the dwelling coverage and should not be lowered. For example, if the dwelling coverage limit on a home is $250,000, the contents coverage may be set at 70% or $175,000. This means in the event of a total loss the most amount of money a homeowner could get for their possessions would be $175,000. An important thing to keep in mind is that in some cases it is valuable for a homeowner to increase the amount of contents coverage they have. If they own specific items of high value such as jewelry or fine art collections- those should be scheduled as an endorsement on their policy for an additional premium.
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Personal liability coverage is included in a standard homeowners insuranceand is often one of the most undervalued portions of a policy until, of course, it becomes needed. Typically the minimum amount of personal liability coverage that a homeowner can have on their policy is $100,000 although many insurance agents these days recommend against carrying minimum liability limits. Some agencies will not write a policy with less than $300,000 in liability coverage simply because they know that in the event that the homeowner is presented with a major lawsuit- $100,000 is usually not enough to cover the lawsuit, legal fees and court costs.
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All in all, opting for lower coverage does not necessarily you will be saving money in the long run. If you are ever need to file a major claim and don't have sufficient insurance coverage you could end up paying a great deal out of pocket that you could have avoided. Your best bet is to work with a licensed agent that can make recomendations for you.
