A house purchase accounts for a sizable net worth of a person. Just like any investment, insuring your house makes economic sense. Ideally the cover should help you rebuild and replace your belongings if disaster strikes. A good policy should also shoulder the financial burden arising from injuries that a third party might suffer within the property.
So, how much homeowner’s insurance should you get? When deciding on this, the following factors will come into play.
Replacement cost of the house
Your house is insured on replacement basis. This means you will be reimbursed the equivalent cost of rebuilding your entire house or part of it that has been damaged.
To this end you should go for a policy whose limit will cover the current cost of rebuilding the house. It should take into account the cost of buying the same type of materials as well paying the labor at current prices.
The policy should also be flexible enough to account for possible changes in building regulations. Such include building code upgrades that may require some aspects of your house to be changed; say better foundations or a different drainage design.
Beware of policies that only cover the original value of a house. The premiums might be lower but they won’t cover any increase in labor or material costs. The payout will also be less the depreciation value of your home.
This is the out-of-pocket money that a policy holder must pay before the insurer settles a claim. It’s advisable to go for policies with high deductibles since they offer low insurance premiums.
A publication by Oregon Insurance Division shows that on average homeowners make a claim once in every 9 years. With this in mind, it makes sense to foot a higher deductible when disasters strike and save on monthly instalments in the long run.
Most insurance companies will increase your premiums or refuse to cover you in the future if you get into a habit of claiming reimbursement for minor damages. The move will ensure that you only file claims when the direst of disasters hit.
Location of your Home
Your policy limits will vary depending on the location of your home. Houses built on sloppy or hilly sites are deemed problematic. Same goes for homes at far off places like a heavily wooded area that may inaccessible to emergency services e.g. fire trucks.
Some locations and states are also flagged as high disaster areas. These include flood, earthquake or hurricane prone areas. If your house is located in such an area then expect to pay high limits on your policy.
Flooding accounts for the highest percentage of insurance claims from natural disasters. You should consider having a policy that addresses it; even if your zone is not susceptible to floods. This is according to Loretta Worters, the Vice President of Communications at Insurance Information Institute
Value of your Possessions
A detailed inventory of your belongings should give you an idea of what you stand to lose as a result of burglary or damage from a disaster. Normally, policies will insure possessions up to 75% of the home value.
You can insure your belongings on their actual value or that of replacing them. Replacement coverage attracts higher premiums but it makes more financial sense. This is due to the fact that most house possessions have a high rate of depreciation.
What Else to Consider
Having factored the above in your insurance calculations, the figure that you come up with should fall within a given margin. Take it upon yourself to find out the average cost in your state and specific city.
To give you an idea of what to expect let’s consider a home coverage of $200,000 with a $1000 deductible and a liability coverage of $100,000. A study showed that:
The national average falls at $1,228 with Florida and Louisiana having annual average rates north of $2900. Hawaii and Vermont attract the minimum coverage averaging at $589 and $337 respectively.
Pro Tip: Your policy limit can vary slightly from the average figure depending on the uniqueness of your home and possessions.
Although home insurance is a must-have for every homeowner it needn’t be expensive. Lack of knowledge on the subject can land you on expensive policies that are not worth your property. Similarly, you may find yourself with a cheap cover that is inadequate for your property. The above information will guide you in deciding on the amount of insurance that you should get for your home.