It’s a homeowner’s nightmare: a fire, flood, or other catastrophe damages or destroys your home—and that’s not the worst of it. The real financial disaster comes when your insurance company only reimburses you for a fraction of the cost to rebuild your home, leaving you to pay the rest out of pocket.
If your insurance hasn’t kept pace with the changes in your life—career advancements, growing assets, new family members—then you are especially at risk.
Indeed, research firm CoreLogic estimates that 60 percent of homes are underinsured by an average of 20 percent. For a $750,000 home, that’s $150,000 in missing coverage. Faced with a gap that large, many homeowners would find it financially difficult to rebuild a home equal to the one they had.
“Most people don’t realize their homes are underinsured until they file a claim,” said Mark Fraser, CEO at National Advisors Group, an independent, licensed insurance agency focused on protecting clients with growing assets. “And that is the absolute worst time to find out you don’t have enough coverage.”
Greater wealth requires greater protection. The purpose of homeowners insurance is to protect you and your family against financial loss caused by disaster, theft, or accident. Most standard policies include coverage for your home and personal belongings, as well as liability protection to help you guard against lawsuits for bodily injury or property damage that you or your family members (including pets) cause to others.
Victor Nawrocki, Chief Operating Officer (COO) of National Advisors Group, says the amount of coverage you need depends largely on the value of your home and your total assets.
“Like most of us, you probably started out with basic insurance needs,” said Victor. “You had a modest house, a car, some jewelry and electronics. You could depend on a standard insurance policy to protect these investments well. “But as you’ve become more successful, your insurance needs have grown. Now you live in a larger home, you drive a more expensive car, and you have more valuable possessions. All of a sudden, your ‘starter’ insurance policy is no longer enough, and it’s left you open to financial risk.”
Mark agrees. “If you haven’t looked at your insurance policies in a while, you may be in for a surprise.”
Nearly 40 percent of homeowners who have made significant home renovations have not updated their insurance policies, or aren’t sure if they have.
Ask yourself these questions to find out if you might be underinsured:
● Have you made any home renovations or upgrades since your last coverage review? For example, have you remodeled your kitchen, added a bathroom, or built a deck?
● Have you bought any additional homes, rental properties, cars, trucks, RVs, boats, or watercraft?
● Do you own any personal property—jewelry, artwork, electronics, camera equipment, musical instruments, collectibles—that is not currently insured?
● Does your current policy provide coverage for earthquake, flood, sewer backup, and mold? (Most standard policies don’t. You’ll typically need supplemental coverage for these.)
● What specific exclusions are listed in your policy?
Be careful—these aren’t the only ways homeowners can wind up being underinsured. Often, it’s simply because insurance is a complex subject that most of us find difficult to understand.
Many homeowners confuse actual cash value with replacement value
One area that trips up homeowners is the difference between current value, or actual cash value, and replacement value.
Victor explains: “Let’s say your home is insured for $1 million, but our replacement-cost calculation comes back at $1.2 million. That’s a $200,000 difference—money you might may have to pay out of pocket to rebuild your home.” It happens often. Some homeowners policies only pay to replace the home as it was at the time of the loss—not the cost of replacing it today.
It’s likely that construction costs, including building materials, energy, and labor, have increased significantly in the years since your home was built. That makes a big difference.
Changes to building codes are also a factor. Says Victor: “Let’s say your home was built before sprinkler systems were required. To meet current building codes, you need those sprinklers. But your policy only pays to replace the home as it was, meaning you’re on the hook to pay for the additional costs out of pocket.”
$1 million in liability coverage may not be enough
Liability insurance is an important part of any homeowners policy. Its job is to protect you from lawsuits in the event that you are responsible for harm to other people or their property. Too little liability insurance could put you at risk of losing everything you own to someone who sues you.
But how much liability coverage is enough?
Many insurance agents advise buying liability coverage equal to one or two times your net worth. Attorneys often settle for the amount of your policy—that is, unless you are underinsured. In that case, they may target all of your available assets.
Mark and Victor suggest having an “umbrella” or personal-liability policy above and beyond any other liability insurance you may have, up to at least your net worth.
“Most policies provide coverage up to $1–2 million,” Mark says. “But if you have $4 million in net worth, you’re terribly exposed. Don’t let that happen to you.”
At National Advisors Group, we specialize in helping people like you—hard-working, successful people who have growing assets and growing families to protect. You want to feel confident that the life you’re building is one you can maintain even in the face of unexpected disaster. We want that for you, too.
You’ll speak with a licensed, experienced insurance agent who will take time to review your coverage, answer your questions, and help you protect the people and possessions that are so important to you.