As your home is most likely your largest asset, you want to be sure it is covered adequately, but what is that magic number? Between the purchase price and replacement cost - how much coverage should you have on your homeowner's insurance policy? HPM Insurance hopes to help guide you toward the right answer.
How Much Insurance Should I Have on My NH Home?
Whether you are a new homeowner or someone who has owned a home for years, having the right insurance coverage is critical in protecting your home and investment. Some estimates show that 58% of houses in the US are under-insured by some 21%! To ensure you are not part of this statistic, here are some things to consider:
1. Difference between purchase price and replacement cost
When you insure a home, your insurance company may require it to be covered for the replacement cost, and not the purchase price. The reason is because many factors drive purchase price, such as supply and demand of home inventory and the property's location. These factors do not necessarily impact the cost to rebuild a home but can significantly add to or reduce a home's purchase price.
Another reason why purchase price and replacement cost vary is because when you buy a house, you are also purchasing land. Land is not a factor when calculating replacement cost on homeowner's insurance given you would still have the land even if the home were a total loss.
2. How do I figure out how much coverage to insure my house for?
The age of your home is a critical factor in determining its replacement cost. Many older homes have customized features like solid-wood doors and trim, built-in cabinets and crown-molding that are simply not standard in today's construction and thus cost more to rebuild and insure.
Even if a newer home, you will also want to consider the quality of the home's flooring, cabinetry, counter tops and built in features. Are the features of your home mostly builder's grade or do you have more customized features such as hardwood and granite? If you have invested in such features, you will want to ensure it is considered in the replacement cost calculation.
Another consideration are additions or finishing off basements, which can also impact the replacement cost of a house. It may be time to reach out to your insurance professional to review the adequate coverage amount vs. what is listed on your homeowners insurance.
3. What if I believe my home is over-insured?
The insurance company does not want to under-insure your home or over-insure it either. Like Goldilocks, the company wants it just right. If you believe your home is over-insured, speak with your insurance professional. Insurance companies utilize software that can easily calculate the replacement cost of a house by entering data like age of home, square footage, number and style of bathrooms, flooring, etc. If you strongly disagree with this figure, most companies will consider an independent professional appraisal as well. If your home is customized and needs someone to do a physical inspection, this too can often be arranged through your company, and often at no cost to you as again, your company wants to adequately insure the house.4. What does Guaranteed Replacement Coverage mean on my NH Homeowners Insurance policy?
Guaranteed replacement coverage is a common endorsement on many NH homeowner policies; however, it can be a bit of a misleading. It would be impossible to calculate the exact replacement cost of almost any home because construction costs will vary depending upon when the home needed to be rebuilt.
For example- a large hurricane makes the supply of lumber and materials low, so the price increases significantly.
Because these factors in the future are unknown, many companies offer a replacement cost endorsement that is added onto the homeowners insurance policy. This coverage provides a level of protection between what you insure your home for and what it actually costs to replace it at the time of loss.
To get this endorsement though, you typically would need to agree to insure your home at 100% of the estimated replacement cost. There are also different types of guaranteed replacement cost coverage. Some are 100% guaranteed replacement cost so no matter how much more it costs to rebuild the home above the coverage limit, the policy will cover it. Most guaranteed replacement coverages though are capped at a specific percentage, often 25% or 50%.
Because guaranteed replacement coverage is not automatic and can vary, speak with your insurance professional to ensure you have the right protection for you.
5. Do I Have to Adjust My Coverage Every Year to Ensure My Home is Adequately Covered?
Because most people think about how much to insure their home for when they first get homeowner's insurance, and rarely again, most insurance companies include an inflation guard on the policy. The inflation guard is typically for a specific percentage (usually between 2% and 8%), and as the name indicates, is designed to increase the coverage by this percentage to keep the coverage up with inflation or the increased cost of building materials and labor.
Both guaranteed replacement coverage and inflation guards are useful protections to help reduce the chance you will be left short on coverage should your home suffer a large loss. That said, it is worth the time to think about your home and coverage and work with an insurance professional to ensure your home is properly covered.