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According to a survey conducted in 2011 by J.D. Powers, 16 percent of U.S. homeowners do not purchase adequate homeowners insurance protection. No one wants to pay for too much insurance, but the last thing you want to learn after a loss is that you did not choose enough coverage to rebuild your home. How can you weigh available homeowners coverages against the premiums you want to pay?
Mistakes That Can Leave You Under- or Overinsured
Did you base your homeowners insurance Coverage A – Dwelling on what you paid for your home? Or perhaps you reduced your Coverage A amount after the real estate bust. The market value of your home — the amount you could sell it for — is not the amount you should select for your Coverage A. Your Coverage A limit should be the cost needed to rebuild your home.
In certain coastal communities, the cost of the land is a significant portion of your purchase price. In those instances, if you simply determined your Coverage A by the purchase price of your home, you could be overinsured, paying too much for your homeowners insurance. On the other hand, if you purchased your home in a depressed real estate market, rebuilding it may cost much more than what your home’s purchase price and you could be underinsured. Remember, the market value, or purchase price of your home, includes the value of your land, the structure, and your home’s current worth, but it is not the same amount you should carry on Coverage A.
Many Floridians and South Carolinians value their home size by the number of square feet under air conditioning. Square feet can provide a simple tool to help you determine if you may be over or underinsuring your home. Replacement costs can range from $75 to $200 per square foot for an average-to-premium home and well over $325 per square foot for a custom-designed home. Consider your home’s distinctive features if using the square foot method to estimate the reasonableness of your Coverage A. For example, perhaps your neighbor’s air-conditioned, 2,000 square foot home is similar in size and would cost $300,000 to rebuild, or $150 per square foot. Your home, upgraded with custom cabinetry, crown molding, granite countertops, and other special features, may cost well over $450,000 or $225 per square foot to rebuild the same amount of space.
Perhaps you purchased your home and properly valued Coverage A at $200,000 in 2001. In 2004, you spent $75,000 customizing your kitchen and building a great room with a custom entertainment center. You may believe that simply adding those two figures together and insuring your home for $275,000 provides adequate coverage. However, construction and raw materials have continued to rise over the past 20 years, so a 2012 Coverage A of $275,000 may be insufficient to rebuild your home after a major loss.
How Can I Be Sure I Am Adequately Insured?
Adequate homeowners insurance-to-value means you are neither overinsured nor underinsured. You don’t want to skimp on coverage, but neither do you want to pay more than you must in premiums. However, to feel confident you can rebuild your home after a claim, you must insure your home for the cost to reconstruct it in a worst-case scenario. Your homeowner’s agent should be able to recommend the appropriate amount of insurance coverage you need.
Your agent should ask about your home’s construction, its square feet, location, upgrades you installed like custom countertops and any structures such as sunrooms. Many agents use a sophisticated estimating program that leaves you confident when choosing coverage amounts.
Personal Property Coverage Choices Affect Your Premiums
There are two ways to cover your personal property – Actual Cash Value (ACV) or Replacement Cost (RCV).
If you choose Actual Cash Value, your reimbursement will be based on the amount it would take to repair or replace the damaged item after depreciation. For example, if your three year old television was damaged in a house fire, your insurer will reimburse you for what your television is worth at the time of the loss, not the current selling price for a similar item.
If you choose Replacement Cost, your reimbursement will be based the amount it would take to replace or repair the item with materials of similar kind and quality. For example, if your three year old television was damaged in a house fire, your insurer will reimburse you for the cost of a similar quality television at today’s selling price.
While Replacement Cost may seem like the best route because you will end up with a replacement of similar kind and quality, the premium for this coverage will cost more. It’s best to consider the cost of the upgraded coverage against the likelihood of a claim.
Other Coverage That Can Help You Avoid Underinsurance
If you do have a loss, you must rebuild your home to meet current building codes. Especially if you have an older home, consider Ordinance or Law Coverage to ensure that your homeowners insurance covers required building code upgrades. Without this important coverage, you may owe thousands of dollars out of pocket to comply with building codes enacted since your home was built. By choosing this important coverage, if you suffer a major loss, your home will meet current building codes with less out-of-pocket cost to you. While Ordinance and Law Coverage costs more, your home will be “like new” once the rebuild occurs.
What Discounts Are Available to the Florida or South Carolina Homeowner?
Because the majority of homes in the southeastern United States were built prior to major building code changes of the past few decades, you may be eligible for discounts if you upgrade your home to better withstand windstorms. Hurricane shutters or other protective window coverings may reduce your hurricane-wind premiums by as much as $264 per year. Installing roof-to-wall connections can save you up to $142 on your hurricane-wind premiums.
Weigh the costs versus the savings for improvements such as roof-to-wall connectors or a central burglar alarm. Remember, though — what price can you put on your family’s safety? Small upgrades to your home not only reduce your homeowners premium, but also make your home safer for your family. They also help ensure that you are optimizing coverage choices while receiving the maximum deductions available on your homeowner’s insurance premium.
Increasing Your Deductible Helps Control Costs
To reduce your premiums, you can increase your deductibles. Providing you have no losses, taking a higher deductible lowers your premiums without sacrificing coverage upgrades. Always consider how much you can afford to contribute toward a loss before increasing your deductibles so you are not underinsured in the event of a major claim.
Talk to Your Agent Today
No one wants to pay more for homeowners insurance than necessary or purchase coverages they do not need. Yet you do not want to learn after a loss that you must pay more to repair or rebuild your home than you expected.
Take time today to reevaluate the amount of coverage you have on your Florida or South Carolina home, before severe weather arrives. Discuss your home’s value with your insurance agent today.