A Guide to Determining How Much Insurance to Buy for Your Home
On nearly every homeowners quote I present to customers, the #1 question I receive is how I determined the amount of coverage to use for the home, or the “Dwelling Coverage” amount.
What is Dwelling Coverage?
The Dwelling Coverage (often referred to as the ‘Replacement Cost’) is not the market value of the home, the assessed value of the home, nor the mortgage amount used to buy the home, but the amount of money it would cost to rebuild the home if it is ever destroyed by a fire. Land is also not a factor in this amount.
How does Dwelling Coverage work?
Your independent insurance agent will calculate the dwelling coverage by entering the square footage, year built, style of home, foundation type, garage type, # of bathrooms, type of kitchen, material of the interior & exterior walls, type of flooring, and energy infrastructure (to name a few) into a replacement cost calculator provided by the insurance company. The insurance companies keep up to date replacement cost calculators by continually updating the current prices for building materials and labor. The insurance companies create these calculators to ensure that their customers are getting the proper protection and so the insurance company is covering homes to their proper replacement value.
Now, here is the important part. Once the agent presents the quote to the customer, the customer decides if they are happy with the dwelling coverage. I would urge, if you trust your agent, to use the dwelling coverage amount the agent has come up with. After all, this is what an agent is for. This will ensure that you have adequate coverage for your home.
Can't I opt for less dwelling coverage?
In a tough economy, customers try to find savings anywhere possible, and one area is their insurance. Most homeowners believe they can simply lower their insurance coverage (dwelling coverage) to save some money. This is true, but it comes with a heavy cost due to the coinsurance clause.
Insurance companies require homeowners to carry at least 90% in coverage of the dwelling/replacement cost, which is the coinsurance clause. So in our example of $300,000, the insurance company would require at least $270,000 in dwelling coverage to satisfy the 90% or more insured-to-value requirement. Insurance companies offer discounts for homeowners who insure to the full replacement cost. The customer will sleep easy having full coverage on the home.
What does that mean in a claim?
Now let’s say that the homeowner decided that he/she wants to lower the dwelling coverage to $250,000, which is 83% of the replacement cost. Let’s also say the homeowner suffers a $100,000 claim. The insurance company will penalize the homeowner with a penalty of 17% taken directly from the claim. It is calculated by the following:
($250,000/$300,000) X $100,000 = $83,333.
The homeowner may have saved a few hundred dollars in premium by lowering their dwelling coverage to $250,000, but have now taken a penalty of $17,667 at the time of the loss, vastly eliminating the saving they thought they found earlier. Instead of receiving $100,000 for the claim, the insured is now only receiving $83,333.
In conclusion, it may seem like the obvious area to save money on your homeowners insurance, but lowering the dwelling coverage on your policy can negatively affect you during a time of a claim, or a total loss. That is not the time to realize you made a bad decision.
Use an independent agent to ensure you are getting the best coverage available for your home, and allow the agent to find discounts for you that don’t affect your coverage.