How much Homeowners Insurance should you buy?
If you’re like 65% of Americans, you own your home and consider it your most valuable asset. In fact, according to the National Association of Home Builders, homes account for 30% of net worth on average. This is why protecting your home with insurance is not only a matter of common sense, it’s an economic necessity. But, how do you determine how much insurance to buy? What limits should you ideally carry on your homeowners policy?
The short answer to both these questions is it depends. The more complete response involves a closer examination of the homeowners policy and your home’s unique characteristics.
Dwellings and Replacement Cost
Homeowners policies insure dwellings (the home itself) on a replacement cost basis. Unlike market value, which can fluctuate wildly, replacement cost is a stable valuation method that calculates the true cost to rebuild a home at current prices. Whether a home needs to be rebuilt in entirety or in part, this valuation method contemplates the same quality of materials and labor as in the original home.
Demolition, removal of debris and building code upgrades needed to conform to current regulations are other components of replacement cost. You will need to include these additional expenses in your calculation of limits needed.
Trends demonstrate a consistent rise in the cost of building materials and skilled labor. The limits you purchase should reflect these trends in order to remain whole after a covered loss has occurred.
Sometimes, repairing a house that hasn’t been destroyed in full can mean removing the roof and rebuilding from the top down. This approach is time consuming and labor intensive and can drive up expenses. Your insurance limit should reflect this possibility.
Always consider the nature of your site when determining your policy limits. Sites that are difficult to access or that have nearby obstructions (such as other homes, trees, landscaping, fences, etc.) are problematic. For instance, costs increase when materials needed to rebuild the home must be off-loaded further away and carried to the site. Similarly, homes built on a slope or uneven ground will drive up labor costs.
If you own an antique or older home, your city or town regulations may require you to rebuild it in compliance with current building codes. Your policy limits need to account for this possibility, which can increase your cost to rebuild considerably. Some common upgrades whose costs quickly add up may involve wiring, plumbing, the switch to fire-retardant materials and installation of new windows with safety glass. Or, you may be asked to adhere to more costly regulations, such as those that involve proximity to water.
Homes that have undergone extensive remodeling may present additional insurable interest. If your home has custom features that are difficult and expensive to replicate, you should factor those costs into your limits.
Your homeowners policy requires you to protect all undamaged property (including contents) from further damage or theft. This added cost may entail covering the roof and securing windows and openings in the walls. As another possible expense, personal property items may have to be relocated.
We encourage you to call your agent to discuss your home’s unique needs. Your agent can guide you to select the appropriate policy limits. Providence Mutual will also support your interest by utilizing the most current replacement cost methods.
You can learn more by reading about Providence Mutual’s Homeowner’s Policy.