Determining How Much Homeowners Insurance to Purchase

For most people, insurance is one of those things that gets easily placed on the back burner in the process of financial decision making. Paying all those premiums seems like a drain on the checkbook when other more urgent needs present themselves. However, consumers should remember that during times of crisis, having adequate insurance can make the difference between being able to quickly recoup losses or having to struggle for years to regain an accustomed standard of living. Homeowners Insurance is especially important for protecting yourself from financial devastation and it’s important to know how much insurance you need in order to evaluate your current financial situation. Remember that your insurance must cover more than just the structure of your home. It also covers your possessions, your living expenses should a covered loss prevent you from living in your home, and your liability in case of injury to another person while on your property.

When considering your home’s structure, take into account current labor and materials costs as opposed to how much it originally cost to build or how much you owe on your mortgage. Any custom features, such as windows, kitchen designs, or bathroom fixtures should also be included. If you have added a room or remodeled, you will need to adjust the amount of coverage on your home. Don’t be tempted to skimp on this, since inadequate insurance may make it difficult or impossible to rebuild in the case of fire or other disaster. Also, remember to include other structures on your property such as a gazebo or garden shed.

Personal possessions coverage falls into one of two categories. You can choose either a replacement plan or an actual cash value plan. A replacement plan will require the insurance company to replace lost items in your home with new ones, even though the item lost may have depreciated in value since you purchased it. An actual cash value plan will cover only the current value of the item lost, which may or may not be enough for replacement. Replacement plans will charge higher premiums than cash value plans, but they will be more beneficial to you in case of loss. Another important part of determining how much coverage you need for your personal possessions is to conduct a home inventory. Most people who experience loss of a home due to fire or other damage find it difficult to recall every item of value that needs to be replaced. This is where a home inventory can provide invaluable help. Consider making a video recording of each room in your home. While recording, talk through each item in that room that you want to include in your inventory. When the inventory is complete, store it in a safe place such as a bank safe deposit box. Limits on personal possessions coverage usually fall within the range of 50 to 70 percent of the structural coverage.

Should home damage or loss require you to live elsewhere during reconstruction, your Homeowners Insurance policy will pay for your living expenses, including hotel bills and meals. There are limits as to how much you can claim for living expenses; usually companies will pay up to 20% of the amount of your policy. Some policies, however, will pay unlimited living expenses for a specified period of time following the loss. If damage occurs to a room or basement apartment that you rent out, living expenses coverage will also pay for loss of rent during the time it takes to rebuild.

Liability coverage is necessary to pay for injury to others that occurs on your property and is caused by you, one of your family members, or a pet. It will also cover court costs and damages you may be required to pay to the injured party. Minimum liability coverage is generally $100,000; however, you may want to consider increasing this amount to give yourself maximum protection.

Homeowners Insurance is absolutely necessary for protection of your largest asset: your home. Most banks will require your insurance to cover the amount of your mortgage, but you should consider increasing the amount of coverage you purchase if your home has custom features or difficult to replace items. Don’t put off examining the amount of coverage you need. In time of loss, you’ll be glad you put in the extra effort ahead of time.

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