It’s a question every homeowner will have to answer at some point: How much home insurance is enough to meet my needs? There are several factors to consider when insuring your home – and not just about your house. A standard home insurance policy will also include coverage for your possessions, temporary living expenses, liability, and more. In this post, we will break down the coverage package available on a typical home insurance policy and help you calculate your actual coverage needs.
Coverage A – Dwelling
Coverage A is the coverage that protects your home’s structure against a wide range of perils. If you have an HO-3 or HO-5 insurance policy (the two most commonly purchased forms of coverage), your home is protected against all types of risks except those excluded in the policy.
A deductible is the dollar amount you agree to contribute toward the cost of any covered claims you make against your policy. This could be as low as a few hundred dollars, but choosing a higher deductible of $1,000-$2,000 could be enough to drive down your annual insurance premiums.
How Much Dwelling Coverage is Enough?
There are multiple factors that affect your coverage needs, such as the cost to rebuild your home. But one thing that should not play an important role in your coverage selection is the price you paid for the home. Far too many homeowners are underinsured for their homes due to a difference in market value and building costs. Instead, we recommend working with an agent here at the Andreotti Agency to assess your actual coverage needs based on:
- Current local construction costs in the Oakdale area
- The cost of cleaning up your property and removing debris after a disaster
- The size of your home
- The materials used to build your home
- And more
If you inaccurately estimate your Dwelling coverage needs, you could fall short of the funding you need to rebuild your home after a total loss. Not to mention, insurance companies can penalize homeowners who purchase too little coverage by underpaying partial damage claims in proportion to the amount the property is underinsured.
Coverage B – Other Structures
Coverage B is additional coverage for structures that are not attached to your home. This could be a detached garage or a fence, neither of which would be covered by your Dwelling coverage. Many insurance companies include default coverage for Other Structures for 10 percent of the Coverage A limit and often at no additional cost. However, you may request higher limits if you have multiple structures on your property or if you have a structure with a replacement value that exceeds the limits on your policy.
Coverage C – Personal Belongings
You have a lot to lose inside your home, from your kitchen appliances and furniture to your electronics, décor, and apparel. Imagine starting over again with nothing more than the clothes on your back. Coverage C is designed to protect you against the loss of your belongings, compensating you for their cash value when they are damaged or stolen due to a covered event. Although every insurer is different, most set default coverage for personal belongings between 50 and 80 percent of your Coverage A limit.
Tip: You can request a policy endorsement that increases your personal belongings coverage to the replacement value of your belongings instead of their depreciated cash value.
HO-3 vs. HO-5
While both HO-3 and HO-5 home insurance policies include exclusions, HO-5 provides more comprehensive coverage for home contents than HO-3. Under an HO-3 home insurance policy, personal belongings are only covered if they are damaged due to a named peril listed in the policy. Under an HO-5 policy, all risks are covered with the exception of the perils excluded by the policy.
Coverage D – Loss of Use
Coverage D helps take care of your finances after a major loss. This section of your policy helps pay for the additional living expenses you may face after being displaced from your home. In many cases, homeowners are forced to live in a hotel or even rent an apartment for weeks or months at a time while their houses are rebuilt. Until you can move back home, Loss of Use coverage can help pay for rent, hotel charges, and other extra expenses up to the limits of your policy, which are usually set at 20 percent of your Coverage A limit.
Coverage E – Personal Liability
The next coverage on a home insurance policy is Coverage E, which provides financial protection against personal liability. This coverage helps pay for legal expenses, as well as settlements and judgments if you are sued for property damage or injury-related losses. We typically recommend purchasing high-limit personal liability coverage – usually a minimum of $100,000 to $300,000. With a few exceptions for things like car and boating accidents, this coverage extends protection for accidents occurring at your home, as well as incidents you or members of your household are responsible for causing when traveling away from your home.
How Much Will a Lawsuit Cost You?
While no one plans to assume liability for another person’s injury or loss, it helps to know you are covered should you find yourself in such a scenario. Imagine, for example, throwing a graduation party for your daughter, when one of her friends slips on your patio and burns herself on the grill. Fortunately, your home insurance liability coverage helps pay your costs when her family sues you for medical bills, including reconstructive surgery.
In another example, imagine walking your dog through your neighborhood one morning, when it attacks another small dog and causes severe wounds. Between the veterinary bills, legal fees, and punitive damages, you are liable for tens of thousands of dollars. Interestingly, Minnesota was the sixth most costly state for bite and other dog-related injury claims in 2014. Insurers spent tens of millions of dollars on the claims that year, with an average cost of $38,302 per claim.
It is in these scenarios that having adequate home insurance liability coverage is of utmost importance. Without the right limits, you might have to dip into your personal savings, sell off some investments, or even make payments from future income to settle the debt.
Coverage F – Medical Payments
Coverage F in your home insurance policy provides payment for third-party medical bills caused by injuries occurring on your premises, regardless of whether you are at fault. Most homeowners are offered medical payments limits of $1,000 to $5,000, which can help pay for a medical deductible or cover the cost of an emergency room visit if a guest needs stitches. While it may not absolve you of liability for the accident, it may be useful for avoiding a possible lawsuit.
Many homeowners opt to add endorsements to their homeowner’s insurance policies. Endorsements help you personalize your coverage to fit your needs and minimize your individual risk exposure. For example, you may choose to add a replacement value endorsement for your personal belongings that assures you are reimbursed for the full cost of your damaged belongings – not just the depreciated cash value. Other common endorsements include:
- Water backup and sewer
- Inflation guard
- Scheduled coverage for expensive belongings or collections
- Home business coverage
- And more
Beyond Home Insurance
If you have high-limit personal liability coverage, your homeowner’s policy is likely enough to provide financial protection for most accidents. However, there are rare cases in which a major liability arises, far exceeding even the highest coverage limits. For these scenarios, we recommend umbrella insurance, which can supplement your primary liability coverage with an additional $1 million or more. This affordable coverage often costs less than $200 per year, yet it has the potential to safeguard your income, assets, and future against financial ruin. For more information about umbrella insurance or to find out if it may be right for you, contact the team here at the Andreotti Agency today.