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Insurance for your home
& personal possessions

Deciding how much you need

The last thing you want to face after your house has burned down or been destroyed by a severe windstorm is that your homeowners insurance will not cover all of the damage. The following information can help you decide how much coverage you need for your home so you're not left underinsured when it's time to file a claim.

Here's what you can do to avoid
being underinsured

  • Find out how much it would cost
    to rebuild your home

    The amount of insurance you buy should be based on rebuilding costs, not the price of your home. The cost of rebuilding your house is based on local construction costs and the kind of house you have, including the type of exterior wall construction -- frame, masonry (brick or stone) or veneer; the square footage of the structure; the style -- ranch or colonial, for example; the number of bathrooms and other rooms; the type of roof and the materials used; and whether it was custom built. Other things that affect the rebuilding cost are an attached garage, a fireplace, exterior trim and a home's special features, like arched windows.
  • A good way to get a ballpark estimate of the cost to rebuild your house is to calculate the square footage and multiply it by local building costs per square feet (1,200 square feet on the ground floor and 800 on the second floor). Suppose building costs in your community and for your type of house is $80 per square foot. The cost to replace your home would be approximately $160,000. You can ask a real estate agent or appraiser for average building costs in your area.

  • If you already have homeowners insurance, make sure you have enough
    Most insurance companies recommend you insure your home for 100 percent of the cost of rebuilding it. Few homes are totally destroyed but if yours is insured for less than 100 percent of the rebuilding cost, you run the risk of not having enough money to replace it with one of similar size and quality.
  • Make sure your agent knows about any improvements or additions to your house so that your coverage is increased to replace them. Depending on the kind of policy you have, if you don't have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items. Look at your policy to see the maximum amount your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy typically appear on the Declarations Page under Section 1, Coverage, A. Dwelling. Your insurance company will pay up to this amount to rebuild your home.

    Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure its enough to cover the cost of rebuilding.

  • Make certain that the value of your
    insurance policy is keeping up with
    increases in local building costs

    If the limits of your policy haven't changed since you bought your home, then you're probably underinsured. Ask your insurance agent or company representative about adding an "inflation guard clause". This automatically adjusts the dwelling limit to reflect current construction costs when you renew your policy.

  • Find out whether you have a "replacement cost" policy for the dwelling
    Most policies these days cover replacement cost for structural damage, but it is wise to check with your insurance agent or company representative. A replacement cost policy will pay to have damaged property repaired or replaced with materials of similar kind and quality.
  • If you own an older home you may not be able to buy a replacement cost policy. Instead, you may have to purchase a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden doors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today. Insurance companies differ greatly in how they insure older homes. Some won't insurance older homes for 100 percent of the replacement cost. Other companies will insure older homes for 100 percent of replacement cost as long as the dwelling is in good condition. In some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size -- make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

  • Find out whether building codes in your community have changed significantly since your home was built
    Building codes require structures to be built to minimum standards. If your home were severely damaged, you might have to rebuild it to comply with the new standards. In some cases, complying with the code may require a change in design or building materials and may cost more. Generally, homeowners insurance policies won't pay for the extra expense but some insurance companies offer an endorsement that pays a specified amount toward these costs.

  • Consider buying a guaranteed
    replacement cost policy

    A guaranteed replacement cost policy will pay whatever it costs to build your home as it was before the fire or the disaster, even if the cost exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials, for example, or other unexpected situations. It won't cover the cost of upgrading the house to comply with building codes.

  • Find out from your local government office whether your home is likely to be flooded
    If it is, contact your insurance agent or the Federal Insurance Administration at (202) 646-4623 and ask about the National Flood Insurance Program. Remember: Your homeowners insurance policy does not cover flood damage. If you buy a federal government flood insurance policy, consider insuring your home for 100 percent of replacement cost and buying insurance to cover the contents of your home as well as the dwelling.

  • Make a list of all your personal possessions.
    This includes everything you own in your home and other buildings on the property, except your car and certain kinds of boats which must be insured separately.
  • Estimate the value of your personal
    possessions at current prices

    The total is the amount of insurance you would need to replace the contents of your home with new items if everything were destroyed.

  • If you already have a homeowners insurance policy, find out how much insurance you have for the contents of your home
    The limit of the policy is shown on the Declarations Page under Section 1, Coverage, Personal Property. The contents limit is generally 50 percent of the amount of insurance on the dwelling but may be as high as 75 percent. Now compare the contents limit with the total value of the items on your list of personal possessions. If you think you're under-insured, discuss this problem with your insurance agent or insurance company representative.

  • Consider replacement cost insurance
    for your personal possessions

    If you have a homeowners insurance policy, find out whether claim payments for damage to your personal property would be based on replacement cost or actual cash value. Check your policy under Section 1, Conditions, Loss Settlement or ask your agent. As with insurance for the structure, a replacement cost policy pays the dollar amount needed to replace a damaged item with one of similar kind and quality without deductions for depreciation. An actual cash value policy pays the amount needed to replace the item, minus depreciation.
  • Suppose, for example, a tree fell through the roof onto your eight-year-old washing machine. If you had a replacement cost policy for contents of your home, the insurance company would pay to replace the old machine with a new one. If you have an actual cash value policy, the company would pay only the value of the used machine. That means you would have to either buy a used machine or pay the difference between the amount your insurance company paid you and the cost of the new machine.

  • Check limits on certain kinds of personal possessions, such as jewelry, silverware, furs
    This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers. If the limits are too low, consider buying a special personal property endorsement or floater. An endorsement is an addition to your policy. A floater is a form of insurance that allows you to insure valuable items separately. Under a floater, you'll be able to insure these items for higher amounts than you can under a standard homeowners policy.

  • Now that you have a list of your personal possessions, keep the list up to date
    If you have a claim, the more information you have about the damaged items -- a description of each, the date of purchase and purchase price -- the faster the claim can usually be settled. Videotape or take photographs of rooms and their contents. Note where and when you bought each item and the price. Write down brand names and model numbers of appliances and electronic equipment. Add new items as you buy them. Keep receipts with your list. Store the list, photos and other records somewhere safe off the premises -- in a bank safe deposit box or with a neighbor or relative -- so that they aren't destroyed if your home is damaged.

  • Be a wise consumer. Use this information to find out how much insurance you need to purchase to avoid being underinsured
    Ask your insurance agent or company representative questions about your policy. Ask your agent to explain what factors were used to calculate the policy limits for the dwelling. If you don't understand the answers the first time, ask again.