Your Homeowner Insurance Coverage is Wrong

Your Homeowner Insurance Coverage is Wrong

House owner coverage is an important component of any good financial plan. Since our homes are probably our biggest assets, protecting ourselves by having the right amount of coverage is important. However, most of us are using the wrong method to calculate our need for homeowners insurance.

Not only are most of us using the wrong method to determine the amount of home owners coverage we need, few of us have recalculated our need since we purchased our house. If you have owned your home for more than a year, you probably have the wrong amount of coverage. Inflation can make a bug difference.

A policy with the wrong amount of insurance always hurts. It can hurt us in a big way should we get less from our insurance company if our house is damaged. It can hurt us when we pay for our policies.

One wrong way to figure out how much coverage you need is to use the amount that you paid for your house. Why is this wrong? One reason it is wrong is because the price you paid for your home includes the land itself. The land isn't likely to burn down. It not insured by your homeowners policy.

Another incorrect way to determine the amount of home owners insurance coverage you need is to base the amount on comparable sales of houses in your neighborhood. This amount is unlikely to be correct. House owner coverage isn't designed to purchase a new house for you.

These methods of computing the amount to insure your home for make sense even though they are incorrect. However, your house owners insurance policy will not buy you a new home if yours is destroyed by a covered peril. It will rebuild your house on your land if it burns down.

The price of nails, sheet rock, and skilled labor in your area affect the cost of rebuilding your home. The cost of purchasing a similar home is not directly correlated with the amount of insurance you should have on your house.

This means that the price of other houses in your area is really irrelevant. The price of the other homes includes the value of the land. It also includes the value associated with the benefits of living in your area.

The quality of schools in your area probably impacts your home's market value. The cost of rebuilding your house will not be impacted by how good the public schools are or how close you are to public transportation.

Your home owners insurance carrier should be able to suggest a method for properly determining the replacement cost of your home. They may have a formula that uses the square footage of your rooms and other factors.

Any number you come up with after doing the calculations will be wrong after a year or so due to inflation or deflation. Be sure to recalculate on a regular basis.

A policy with the wrong amount of coverage can mean that you either pay too much for your policy or get paid too little if your house is destroyed by a covered peril. Be sure to value your house the right way.

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