An unsolicited insurance quote caught Frank Glaser’s attention. The annual premium was $150 cheaper than his current homeowner’s policy, and the new insurer maintained Glaser needed only $160,000 in coverage for his 2,800-square-foot home-a whopping $100,000 less coverage than his current insurer required.
Glaser, a retiree, decided to check around. Several quotes later, he found out what few people know: There is no standard way to determine how much insurance coverage is necessary to replace your home.
“It’s a little bit arbitrary, depending on the insurer you contact,” acknowledges Steven Goldstein, vice president of the Insurance Information Institute, a New York-based industry information service.
Check up on policies
That fact is troubling because having sufficient insurance is of pivotal importance when it comes to rebuilding your home and replacing personal items after a theft, emergency or disaster.
Notably, insurance experts believe that millions of people either have too much or not enough homeowner’s insurance coverage because of inattention or misunderstanding.
Those who have been with the same company for a number of years are particularly vulnerable, experts say. That’s because some insurers automatically adjust your policy coverages by “an inflation factor,” which may exceed the actual amount of construction cost inflation in your area, leaving you overinsured.
Other insurers don’t adjust policy coverages unless you ask them to, which could leave you dangerously underinsured after a period of years.
So how do you determine and maintain the right amount of coverage? Most people rely on their insurance agent. But oddly enough, insurers say you’re better off talking to real estate and construction experts and then doing some investigation on your own.
Figuring your coverage
To determine the amount of coverage you need, figure out what it would cost to rebuild your home as is. And you must determine whether all the ancillary coverages that pivot off the dwelling coverage would be sufficient to cover things such as your contents, landscaping and detached buildings.
That’s because limits on contents and landscaping-all part of your homeowner’s insurance package-generally are tied to the face amount of your policy. Each insurer has different limits, but commonly contents coverage is limited to 50 percent of the policy amount; landscaping is 5 percent of the face amount. “Loss of use” payments-the amount an insurer pays if you must rent another residence while your home is being rebuilt-also can be limited based on the face amount of your policy.
What does that mean in dollars and cents? Let’s say John Smith’s four-bedroom house burns down. He has a $100,000 guaranteed replacement cost policy, but it actually costs $200,000 to rebuild. The insurer pays the full amount to rebuild the home, even though he’s seriously underinsured.
What about contents? Smith’s policy limits coverage to 50 percent of the $100,000 “face amount” of the policy. But his losses are $75,000, so $25,000 of his loss is uninsured.
Landscaping coverage is limited to $5,000, or 5 percent of the $100,000. He has $10,000 in losses, so $5,000 of that is not covered. He has a sum total of $30,000 in out-of-pocket expenses, thanks to the inadequate coverage.
How can you avoid such problems? Periodically-once every two or three years-check per-square-foot building costs with local contractors or building groups.
Multiply the appropriate building cost by the square footage in your home. For instance, if standard-quality construction costs run $70 per square foot in your area and you have a 2,000-square-foot dwelling, you should have $140,000 in coverage.
Then, inventory your personal effects and estimate what it will cost to replace everything. If your policy would not adequately cover your contents given its current limits, consider increasing the face amount of the policy or buying separate coverage “riders” for your more expensive possessions.
Building a `package of policies’
Homeowner’s insurance is a “package of policies.” Generally, coverage limitations on several items in the “package”-home contents, landscaping, reimbursement for loss of a detached garage or separate structure-pivot off the structure coverage. In other words, if you have a $100,000 homeowner’s policy, that is the amount the insurer would pay to rebuild your home. The amount the company would pay to replace your contents generally amounts to a percentage of that-usually 50 to 75 percent.
Here’s how some homeowner’s coverage limitations might work, assuming a $100,000 policy. It is important to note that every insurance policy is different. Check your policy to see how it conforms or deviates from these industry norms.
Structure: $100,000
Contents: $50,000 (50 percent of structure amount)
Detached garage/separate structure: $10,000 (10 percent of structure)
Landscaping: $5,000 (5 percent of structure) (x)
(x) Landscaping is generally covered only in the event of a fire. Loss of trees, shrubs and grasses from wind-storm damage is generally not covered.
