Nobody wants to consider the possibility that their home could be destroyed by a disaster or fire. But it’s important to be prepared nonetheless, and having the proper insurance will help you protect your home and provide for your family. So, the question is: do you have enough home insurance? There are a few things you have to ask yourself to answer that and make sure that you can get back on your feet after a loss.
Is your home insured for its replacement cost?
The replacement cost of your home is different than the market value of your home. The market value is how much someone would pay for the home and the land – it doesn’t factor in the construction costs. When a home burns to the ground because of a kitchen fire or lightning strike, there are additional costs to consider that come along with rebuilding. There’s the cost of building materials and the labor of the contractors to consider, too.
As you can imagine, the costs of reconstructing a home can rise very quickly, and without the right home insurance you might end up having to a foot a bigger part of the bills than you were expecting. Which is a not-good surprise. It’s so important that your home has enough insurance to completely rebuild it, and that means that your limit of coverage has to be set high enough. While it would be amazing if a home-building fairy could wave a magic wand and poof a new home into existence, that is not the case. Unfortunately. Your home insurance has to be your magical fairy.
To find out what the replacement cost of your home is, you’ll have to consult a trustworthy builder and have them come out to take a look at your home. They’ll look at the materials your house is built of and help you pinpoint the replacement cost. So do some research and find a reputable builder. Remember, the replacement cost is not the market value, the cost of the land, or the amount of a mortgage.
Are your belongings insured for their replacement cost?
Now that we’ve covered the structure of the home itself, let’s talk about all of the stuff inside the house. There are a couple different ways you can insure your personal property. You can insure your belongings for their actual cash value (ACV) or their replacement value.
Actual cash value will reimburse you for the value of your items at the time that the disaster occurred, and that means taking depreciation into account. The items in question are probably worth less now than they were when you bought them.
Replacement cost value means that your belongings will be replaced at the current price. This means that you can replace them at the price they would cost today (well, minus your deductible.)
To illustrate, let’s say that you bought a new set of couches for the living room a few years ago. You have a fire. The couches cost $2,500 when you bought them, but are only worth $1,250 at their depreciated value, meaning that they were worth $1,250 when they were destroyed. But to buy those exact couches now, it would cost $2,750. If you had ACV insurance, you’d get the $1,250 minus your deductible. With replacement cost insurance, you’d get the full $2,750 (minus your deductible).
As you can see, to replace the belongings that you lost at today’s prices, you would need replacement cost insurance. And you’ll need enough insurance to replace all of your belongings. This is why taking a home inventory is important to your insurance.
Let’s set some goals for home insurance limits.
Goals are important to help you succeed in life. Here are some goals that you should set when you’re setting the limits on your home insurance policy to make sure that you have enough coverage to help you get through a disaster.
1. Have high enough limits to rebuild your house completely if it’s destroyed by a covered disaster.
2. Have enough insurance to replace everything in the house.
3. Have enough insurance to protect your liability.
Home insurance is your means of protecting your biggest asset. You need to be sure that you have enough insurance to completely rebuild your home if it were destroyed. You need to periodically review your policy and make any changes that you need to. It’s important to consider any recent remodeling and how home renovations could affect your coverage needs. Know what your policy does and does not cover. There are, sadly, no home-rebuilding fairies to rebuild your home.
Speaking of home insurance, do you want to save on your home insurance rates? We can help with that! To get your free home insurance quotes, all you have to do is fill out our online quote form or give us a call. One of our home insurance wizards – ahh, agents – would be happy to help you.