How Much Insurance Is Enough: Protecting Your Family with Home Insurance
Your home insurance policy is your defence against the worst-case scenario. Whether it’s a house fire, basement flooding, or a natural disaster, damage to your home or your belongings can be both emotionally and financially devastating. You do all you can to protect your family, and one of the most important financial steps you can take to do so is taking out the right home insurance policy.
Many homeowners sign or renew their policies without fully understanding what they are agreeing to or paying for. Too many homeowners are faced with an unpleasant surprise when they have to file an insurance claim: they did not have the kind of coverage they were expecting. Do not wait until after you have a loss to understand exactly what your policy covers now, and what you may need to change in order to best protect your home and financial investment.
This guide will help you evaluate your home insurance policy and determine if you have enough coverage in the event of a fire, flood, or any other common type of loss.
How Your Home Insurance Premiums Are Calculated
For many homeowners, their insurance premiums are just another bill. The average cost of home insurance is roughly $80 a month, and many homeowners are eager to minimize what they pay.
However, those premiums are typically based on the quality of the coverage you have. There are three types of coverage you can get: basic, broad, and comprehensive. These relate to the types of perils covered by your insurance policy.
Basic insurance may only cover perils explicitly named in your policy, such as fire, wind, or theft.
Broad coverage may cover structural damage from unnamed perils but will also cover contents destroyed by perils named in your policy.
Comprehensive coverage is more inclusive, covering almost all possible perils, with a handful of named exclusions.
How Much Home Insurance Do You Need?
As you decide how much home insurance you need, keep in mind what your policy covers. The home insurance claims lawyers at Virani Law have explained the three most important coverage areas when you open an insurance claim after a fire or flood: Structure, Personal Property (Contents), and Additional Living Expenses. It also helps to understand the Liability coverage your policy carries. Understanding these coverage areas can help you evaluate your needs.
Structure
The cost of rebuilding your home should not be underestimated. Structure coverage determines the amount of money the insurance company will pay to repair or rebuild your home after a loss. After a fire or a flood, the cost of structural repairs can be extensive. If you do not have enough Structural coverage, it can cause serious complications with your mortgage lender.
Mortgage lenders are commonly listed as co-payees on home insurance claims given their interest in the home. This means that they can collect any funds the Insurer has agreed to pay as part of your structural claim. If you do not have enough coverage to rebuild your home, your mortgage lender may keep the insurance payout and close your mortgage.
How do you ensure that you have enough Structure coverage? The next time you renew your policy, try asking contractors in your area for quotes on work to build a home just like yours in your neighborhood. You can also go as far as having an appraisal report done on your property to get an idea of its current value. If you are using a broker, they do have systems to help estimate value and coverage, but it is always recommended that you also seek out this value to ensure there are no surprises if a loss does occur. You should also make sure that you keep your insurer informed of any major remodelling or additions that you do as this changes not only the value of your home, but the risk that your insurance company has chosen to insure.
Personal Property (Contents)
Do you know how much the clothes in your closet would cost to replace? The average household spends about $1,141 a year on clothing items like shirts, pants, and shoes, although that number can vary widely based on the number of people in your household, your taste in fashion, and where you do the majority of your clothes shopping. Your wardrobe can make up a large portion of your Personal Property claim when you consider every item you own. Also consider the furniture pieces you have, and try to determine what a rough estimated value would be.
If a fire affects your entire home, you will be faced with the costs of replacing all the contents in your home, which is often times a longer list than we may expect.
Additional Living Expenses
These include costs such as temporary accommodation, additional mileage, storage, and additional emergent food costs incurred immediately after the loss, and while your home is being repaired. These costs can add up, particularly when you consider how much it can cost to secure temporary rental housing while your family waits for repairs to finish, which could potentially take up to a year depending on the damage.
Liability
Liability has the potential to be one of the more expensive and contentious parts of your insurance coverage. Through liability coverage, your home insurance policy protects you against the costs of damage that you cause to someone else’s person or property in relation to your home. For example, if you caused a fire to break out in your backyard, even by accident, and that fire spread to your neighbor’s house, you could be held responsible for all of that damage. Liability coverage means that your insurance policy will cover those damages.
How Much Should You Pay in Premiums?
Several factors go into the insurance premiums that you pay. Part of it is your choice of coverage, and part of it is factors outside of your control.
Coverage
The more extensive your coverage, the higher your premiums are likely to be. However, consider the cost of everything you keep in your home and add the costs of repairing your home in case it were to be damaged by a fire. Then, compare that cost with your emergency savings. How much would you be able to afford if your insurance did not cover everything?
Insurance is often required by mortgage lenders, and many homeowners simply see it as another bill that they should minimize if they can. Instead, think of it as your guarantee that you can rebuild after a disaster. If you want the best level of protection, it may be worth it for you to pay a little more each month for your premium.
Deductible
Whereas the comprehensiveness of your coverage impacts the total amount your insurance will pay, the deductible impacts how much you need to pay before your insurance coverage kicks in. A deductible is the minimum expense you must pay for a loss before you can file an insurance claim. For example, if you have a $1,000 deductible and a wind storm causes $500 worth of damage to your roof, you would not file a claim given the costs far outweigh any benefit.
Raising your deductible is a common way to save money on premiums, but consider what you can afford. If you devote the savings to an emergency fund, it can make sense. Be deliberate with your budgeting if you do choose to go with a higher premium.
Frequency of Claims
Frequent claimants may face higher premiums than homeowners who do not tend to require their insurer’s attention very often. Some homeowners may make claims more frequently because they live in areas with more weather risks, including windstorms and basement flooding. These increased risks are also reflected in their premiums where rates are typically increased as a result.
Natural Disasters
Natural disasters such as wildfires are extremely costly events for insurers. Wildfires and floods can affect thousands of people at once, leading to large payouts by the insurance industry. Insurance companies may raise premiums across the country, not just in high-risk areas, in order to shoulder the rising cost of climate-related damage.
Updating your home insurance policy will help you protect your family if your home is damaged. Be sure to consider the realities you would face if a potential loss occurred. It is always better to be over prepared than to have to deal with the stress and financial burdens if a loss does occur before you were able to review and update your insurance policy coverage.
