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
- 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
- Make certain that the value
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
- 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
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
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
- 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
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.