How Much Home Insurance Is Enough?

Home Owner’s insurance policies are often an
after-thought–that is, until disaster strikes.

Home owners in Joplin, Mo., Tuscaloosa, Ala., and other cities
recently flattened by tornados are now finding that out too late as they
discover that their insurance policies likely will not entirely cover the costs
to rebuild.

While most home owner’s
insurance policies will cover tornado damage, many home insurance policies are
undervalued. In fact, one study from 2008 by Marshall & Swift finds that 64
percent of homes are undervalued for insurance purposes.

Home Owner’s insurance coverage typically comes in three
categories:

  • Replacement cost: It covers the cost of replacing or repairing a home, based on
    a certain dollar limit. However, some home owners with this type of insurance
    find that their insurance does not reflect increases in the cost of construction
    since they originally took out the policy.
  • Extended replacement
    cost:
    The insurance company will pay a
    certain percentage above the replacement cost to account for inflation. However,
    home owners still may face inadequate coverage with this too, particularly if
    they haven’t updated their insurance coverage in awhile.
  • Guaranteed replacement
    cost:
    Regardless of how much prices have
    increased since first taking out the policy, this coverage will pay the total
    cost of replacing your home. This coverage can be expensive and also difficult
    to even get.

Most standard home insurance
policies also include an “inflation guard” provision, which automatically
adjusts the coverage limit when a policy is renewed, but some coverage may
charge extra for this.

Many policies also
will cover lost or damaged possessions at about 50 percent to 70 percent of the
amount of insurance on the home. (The USA Today cites an example: If your policy
provides $250,000 to rebuild a home, you may stand to also get $125,000 extra to
replace your damaged belongings.)

Source: “If Disaster Strikes, Will Your Insurance
Come Through?”
Gannett News Services
(May 31, 2011)

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