How do I know how much insurance to purchase for my homeowner’s policy?
We get this question a lot, and it’s a good one. Many homeowners are confused about what amount they should insure their homes for. At the same time, other homeowners make the mistake of assuming that their home simply needs to be insured for whatever they paid for it. For example, if they paid $100,000 for their home, they may mistakenly choose to insure their home for the same amount — $100,000.
The truth is that the coverage amount you choose for your homeowner’s insurance policy is rarely the same amount as the market value of your home (how much it would sell for if you sold it right now).
Why shouldn’t you insure your home for the market value price?
We completely understand how a homeowner might assume that their home should be insured for its market value. The problem is that the market value of a home will inevitably be much different than the cost it would take to replace the home if a catastrophic event like a tornado or fire occurred. This cost is called the replacement cost of a home, and as you can see, it’s quite different than the market value.
Here are some reasons you might end up insuring your home for more than you paid for it (common):
- Every year, the cost of materials and labor will change.
- You may need to get creative with new materials for replacement. Sometimes, to ensure you’re rebuilding your home to its original look and function, you’ll have to choose different, newer, or harder-to-find materials, which will drive the replacement cost up.
- Constructing an entirely new home (replacing it) always costs more than buying a home that is already built.
Here are some reasons you might end up insuring your home for less than you paid for it (less common):
When you purchased your home for its market value, the price of the land itself was factored into the overall cost. But when you replace a home because of a disaster, you won’t be replacing the land, so this cost should not be factored in.
- It’s possible your home’s specific location (region, town, metro area) factored into the overall market value (the price you paid) of your home. This value won’t need to be replaced either, so it shouldn’t be factored into how much insurance coverage you choose.
What about co-insurance?
When choosing a coverage amount for your homeowner’s insurance policy, co-insurance is another factor you’ll need to think about.
Co-insurance, where homes and property are concerned, is tricky — even for a lot of agents.
Property co-insurance is not to be confused with the co-insurance commonly used in health insurance policies.
Essentially, your home insurance company will have a “co-insurance policy.” You absolutely must look over this policy before buying insurance as the policy will tell you the minimum amount of insurance you’ll need to purchase for your plan.
If you don’t purchase the correct amount, you may end up reducing the amount of any partial loss claim you make in the future. To determine the co-insurance policy of your plan, speak to your insurance agent.
Get help from your insurance company!
Helping you figure out how much insurance you’ll need for your homeowner’s insurance policy is what we’re here for.
If you’re in the middle of purchasing homeowners insurance for your home, be sure to contact us at Wolfgram Insurance. One of our friendly and knowledgeable agents would be happy to assist you in finding the perfect amount of coverage for optimal peace of mind.