Homeowners insurance is intended to offer a broad range of protections related to your home and the possessions inside of it. Additionally, this type of policy can address potential liability issues related to your property, including incidents involving yourself, your family, and your pets.
The clear value homeowners insurance provides — and the fact that so many mortgage providers require homeowners using their services to have such coverage in place — makes it a popular option. However, simply purchasing a policy may not be enough to offer effective and relevant protection.
An estimate developed by CoreLogic suggests 60% of homes are underinsured, at an average of 20% under their home’s value. For higher-value homes, that gap in coverage can present a significant obstacle to fully and completely repairing or rebuilding a home following a covered incident. And, unfortunately, some homeowners don’t realize that they’re underinsured until an incident occurs and difficult decisions about how to rebuild, and how to fund that process beyond the compensation provided by a policy, arise.
Let’s take a closer look at what being underinsured means when it comes to home insurance, the serious issues that can arise without an effective level of protection and how to secure a homeowners insurance policy that more comprehensively addresses your needs.
What it means to have underinsured home insurance
To put it simply, being underinsured means you lack adequate insurance coverage. Investopedia pointed out that underinsurance is an insufficient insurance policy, one that could make the policyholder personally responsible for a large portion of the total loss or expense and may lead to financial hardship.
In the context of homeowners insurance specifically, being underinsured means your policy will likely only cover part of the losses should you need to file a claim following a catastrophic event.
An underinsured home insurance policy is better than no policy at all, but it can expose you to significant risks. And that’s far from ideal for homeowners insurance — or any type of insurance, for that matter.
How much coverage should I have for my home?
The coverage limit for your home insurance policy should allow you to accomplish three key tasks following a covered incident that damages your home, as the Insurance Information Institute explained:
- Repair or rebuild the structure of the home in which you live. This is called dwelling coverage.
- Replace any belongings damaged or destroyed in the incident.
- Address the price of temporary living arrangements if your home is uninhabitable following the incident.
Additionally, a truly effective homeowners policy needs to provide adequate coverage should your home, your family or yourself face a situation where you have liability to another party.
Determining the amount of coverage you need requires some careful planning, taking into account everything from the cost of construction in your area and the size of your home to the possessions within it and any unique or expensive features present. More subjective concerns, like your personal appetite for risk, also come into play. For that reason, working with a licensed, experienced, and trustworthy insurance agent is the best way to build an accurate and detailed estimate that directly informs the policy limit.
However, you can develop your own estimate, whether it’s out of simple curiosity or to be more informed when seeking out a new policy. We’ll share information for doing exactly that later on in this article.
Disadvantages of not having enough homeowners insurance
We’ve already discussed a foundational reason why being underinsured is so dangerous in terms of homeowners insurance: It can leave you personally responsible for a variety of costs related to rebuilding a home following a covered incident.
It’s important to keep liability in mind as well. If your policy has inadequate liability insurance, a similarly adverse situation can arise. Should a guest or visitor suffer an injury on your property and hold you liable for it, you may be vulnerable to a lawsuit intended to recoup the cost of medical bills, repairs, and related concerns.
The proper level of liability coverage in your homeowners policy can shield you from the financial repercussions of such an event, assuming you are held responsible by the court. If you are underinsured, however, you may have to use your current assets to make up the difference between the policy’s limit and the total value of the court judgment. In an extreme scenario, one where the amount owed is exceptionally large, you may even need to sell your home to address this responsibility.
We’ve already noted that creating an accurate estimate for the replacement cost of your home is a detailed but by no means impossible process. Keep in mind that the ultimate goal of this exercise is not necessarily to absolutely, precisely align your policy with the calculated projection.
What’s far more important is avoiding significant gaps between the value of your home and the policy’s limit. This type of deficiency could leave you responsible for paying tens or hundreds of thousands of dollars when it comes time to rebuild or address a situation where significant liability exists.
How to prevent your home from being underinsured
You recognize that your homeowners insurance should provide effective support, addressing the costs of covered repairs, rebuilds, and personal liability in the unfortunate event that such a situation arises. How can you address this need?
Determine if your home sits in a high-risk area for certain disasters
Hurricanes, earthquakes, and other major weather events and natural disasters might be relatively common or almost unheard of in your local area. If there’s a higher than average likelihood that such an event could occur, you need to consider addressing that risk through your homeowners insurance. A higher premium can be well worth it if your home needs extensive work following a hurricane, or if a winter storm both causes property damage to your home and renders it uninhabitable — requiring that you and your family stay elsewhere while repairs are completed.
Purchase more than the minimum amount of homeowners insurance
If you have a mortgage on your home, which is the case for the majority of U.S. homeowners, as Bloomberg Quint noted, it is extremely likely that your lender required you to purchase homeowners insurance. Lenders also commonly define a minimum coverage limit, such as the purchase cost minus your down payment. While you need to at least maintain this required level of coverage, you can go above and beyond it to ensure your home is more thoroughly protected.
If you have an extensive art collection, high-end furniture, rare antiques, or a variety of other valuable assets, for example, insurance based only on the value of your home may not adequately protect everything in it.
Changes in local construction costs and many other factors may also influence the value that a homeowners policy can provide in terms of repairing, rebuilding, and addressing liability over time. Similarly, if you add on to your home, or take steps to significantly improve it — such as installing a central HVAC system and ductwork — the value can change as well.
Even larger-scale demographic developments, such as consistently increasing property values, may create a deficiency with a policy that isn’t updated. That brings us to our next strategy to prevent underinsurance.
Regularly speak with your insurance agent, and provide updates as needed
There is so much that can change in a relatively short period of time when it comes to your home. The examples we just outlined represent only a few situations that can cause a homeowners policy, and the associated coverage limit, to become outdated.
While it can be easy to recognize that your policy may need to be updated, it can be very difficult to determine exactly how that coverage should change and what additional coverage is needed. Insurance is a highly technical, specialized, and regulated environment, and it’s often not realistic to expect someone outside of the industry to have a full and complete grasp of every single relevant factor related to a policy. This is why the support of a licensed, experienced, and trustworthy insurance agent is so valuable when it comes to making final decisions about coverage amounts and policy limits.
When you speak with your agent, you can share important details and context related to your home. That might range from “We just added an extension with a sunroom and porch” to “the home values in my neighborhood keep rising.” Your agent can take these factors into account, adjusting existing information as necessary and asking follow-up questions that help them build a carefully calculated new estimate of ideal coverage.
Determining how much homeowners insurance you need
If you invest the necessary time and effort, you can build an estimate of how much homeowners insurance you need to provide effective protection and avoid being underinsured. Your goal is to determine the current cost of entirely rebuilding your home, representing the worst-case and most costly scenario in which your homeowners insurance will come into play.
Considering these factors can help you start to build an understanding of the level of homeowners insurance coverage needed to ensure a complete replacement:
- The materials used to construct your home and the style in which it is built. A house with exterior stone walls and a less common architectural style — or a complete custom build — will likely be more expensive to rebuild than a home using standard wooden frame construction and layout.
- The size of the home, as a larger rebuild involves more costs than a smaller one.
- The accessibility of labor and materials. This may not be a major concern for a standard home in a densely populated area, but could lead to higher costs if uncommon building materials and workers with advanced or specialized knowledge are needed.
You’ll also need to consider the belongings within your home and the costs associated with temporary lodging while your home is being rebuilt. Only taking the structure of the home itself into account can leave you underinsured when it comes time to replace expensive appliances, technology, art, and collectables — any type of personal property a policy can cover. Factoring in needs for liability coverage is also vital for determining the ideal coverage limit of a policy, even though it isn’t directly connected to repairing and rebuilding your home.
Creating an effective estimate, one that’s accurate and supports your goal of protecting your home and the people and possessions inside of it, can be a long and complex process. When you partner with a dependable, experienced, and licensed insurance agent, you can draw on their professional expertise to more efficiently and effectively reach a useful result.
A partner that takes you into account
The best homeowners insurance is tailored to the policyholder’s needs, taking many specifics and details into account. Setting an effective level of protection through your policy’s coverage limit means you’re more prepared should an extreme accident or event occur. That, in turn, provides valuable piece of mind.
Skip the mass-market, cookie-cutter approach to insurance — choose an agency that is committed to working with you as an individual and addressing your specific wants and needs. Request your no-cost quote from National Advisors Group today!