Imagine saving for a home downpayment for years, then working to pay off a mortgage, only to have the home burned down in a fire. How would you be able to get your life back to normal?
The most common type of homeowners insurance (HO-3) protects you in case your home or belongings are damaged, stolen, or destroyed by fire, hurricane, hail, lightning, and all other disasters that are not specifically excluded in the policy.
Most mortgage companies require borrowers to have insurance coverage for the value of their house when they buy a home. While an insurer may recommend a coverage limit for your home, it is a good idea to familiarize yourself with what homeowner insurance covers, and how much coverage you should have.
Dwelling Coverage
In the event that your home is totally destroyed by a fire, you want to make sure your dwelling coverage is enough to pay for all the costs associated with rebuilding your house from the ground up (this is not the same as the price that you paid for the property).
To calculate how much it would take to rebuild your house, multiply the square footage of your home with the local construction costs. You can find this information on the websites of most construction companies or by asking your real estate agent. You would also have to include any attached structures, such as a deck, built-in appliances, like a water heater, and any improvements you make to the house, such as new floors or marble countertops.
Keep in mind, the cost of rebuilding your home will be higher if you are rebuilding at a time when construction costs are high. If your whole neighborhood was hit by a massive fire, and all your neighbors are all rebuilding at the same time, it could drive construction costs up a lot.
Personal Property Coverage
Most homeowner insurance policies also cover personal belongings both inside and outside the home, such as furniture, computers, appliances, clothing, and other belongings that have been stolen or destroyed (except your car). You want enough personal property coverage to replace all of your belongings in case they are stolen or destroyed.
Generally, insurance companies will set the default personal property coverage limit at 50-75% of your dwelling coverage, but the amount of coverage you need depends on how much stuff you have and how valuable it is. The best way to accurately assess the value of your property is to take a home inventory. There are many apps that allow you to take a detailed inventory of your things, along with notes about their value. Having a regularly-updated inventory will make it much easier when you submit a claim to the insurance company.
TIP: It is easy to take an inventory of your things while you are packing them up before you move.
Liability Coverage
Personal liability coverage will pay for any legal and medical bills that occur if someone gets hurt on your property. So if your dog bites the neighbor, your insurer will pay any of their medical expenses. Also, most insurance companies will pay your medical expenses if your neighbor’s dog bites you, so make sure to ask your insurer what they cover.
While most insurance companies will provide a minimum of $100,000 worth of liability coverage, experts at the Insurance Information Institute recommends that homeowners purchase at least $300,00 – $500,000 worth of liability coverage.
Additional Living Expenses Coverage
If your house burns down, you are going to need a place to live while you are rebuilding it, that’s where additional living expense insurance (ALE) comes in. ALE covers hotel bills, restaurant meals, and other living expenses you may incur while you are not able to move back into your house.
Supplemental Insurance
A standard insurance policy will not pay for damages caused by a flood, earthquake, or routine wear and tear. In order to get coverage to protect against these and other damages, you may have to get supplemental insurance.
If you are unsure of how much homeowners insurance to buy, talk with insurance companies, mortgage lenders, and real estate agents. They can help you get the proper coverage to protect you, your belongings, and your house from whatever life throws at you.