Shopping for insurance isn’t the most satisfying kind of retail therapy out there. It can be downright stressful. We’re here to make it a little easier, starting with a key decision you’ll have to make about your home insurance: How much should you insure your home for. Keep reading to find out what you need to know.
What is Replacement Cost Coverage?
When it comes to home insurance, replacement cost coverage provides enough reimbursement to rebuild your home from the ground up if it’s totaled by a covered peril. This is the gold standard of coverage–and as such, it tends to cost a bit more than insuring your home for a lesser amount, but it is likely the right choice. Replacement cost policies typically have a cap; i.e., they’ll pay to rebuild your home up to a certain amount. You can opt to purchase even more coverage and pad this amount by a certain percentage, essentially increasing the cap that your insurance company is willing to pay to rebuild your home to its original specifications.
What is Actual Market Value Coverage?
When you buy a new home, the amount you paid for the home is what is referred to as market value, or actual cash value. And when shopping for insurance, you might assume that the amount you paid for your home is what you should insure it for. However, what you would find is that if you were to rebuild your home in the case of a total loss, you would likely run short of funds and be forced to pay the difference out of your own pocket, or settle for a smaller home. The simple fact is, you can buy an existing home for less money than it would cost to build a similar home.
How Much Coverage Do You Need?
Most financial experts recommend full replacement cost coverage, assuming it’s affordable. If full replacement insurance ends up being more than you want to pay–or if you live in an older home and would be okay with purchasing another home in case of a disaster, rather than rebuilding your old home–then an actual market value policy may be an option.
Things to Consider
Of course, when it comes to insurance, options are rarely black-and-white simple. There are some nuances to this decision, so consider these when you’re weighing your options.
- Don’t consider the property inside your home. We’re talking about the actual structure of your home here, not the personal belongings inside. Personal property insurance is important–and a separate coverage issue. Incidentally, you can purchase either full replacement coverage or actual market value coverage for your personal property no matter what type of home insurance coverage you choose.
- Have a mortgage? Your lender probably has a minimum amount of insurance you’re required to carry on your home. It makes sense, after all; they’re interested in protecting their investment, too. Whether you’re buying a home and insuring it for the first time or just changing your coverage around, consult your lender to find out what their minimum insurance requirements are.
- Consider opting for an Inflation Guard Endorsement. This type of addendum to your policy helps protect against your policy losing value due to inflation as years pass.
Still not sure which option to choose? Feel free to contact us at G&L. We can help talk you through your coverage options.