Is your Homeowners Insurance Adequate?

When disaster strikes, homeowners too frequently receive nasty surprises when they discover that they're not covered. Many victims of hurricanes, earthquakes, floods and other natural disasters often find themselves holding the bag because their homeowners insurance did not cover the damage. Too many homeowners make the mistake of assuming that their policies cover every type of damage, when in fact, it does not. Although many events are covered, catastrophic events such as hurricanes usually require separate riders or endorsements.

A big factor in deciding on insurance levels is the replacement cost of your home and its contents. Many traditional policies pay out for cash value, which means that depreciation is figured in. The check you receive from the insurance company therefore, is for much less than what it will cost to replace what you lost. You can, however, purchase replacement cost coverage, and although your premium will increase, it is well worthwhile.

Another big consideration is renovations you may make to your home. If you make renovations or additions, but then don't tell the insurance company, those additions won't be covered. One of the most common types of homeowners insurance claims is for dog bites, accounting for nearly a quarter of all liability claims. Most carriers do offer coverage for dog bites, but often will exclude coverage for certain types of breeds, such as pit bulls.

Coverage for earthquakes and floods is usually not considered part of a standard policy, and will require an addition or rider. Depending on how close you are to an active earthquake fault or flood zone, the price of this additional coverage will vary. In flood-prone areas, mortgage companies will often require the homeowner to obtain flood insurance, which may be very costly in certain areas.

Another thing to consider is that the price of your home is probably going up year after year, but your coverage levels may not. Revisit your policy every year to see if your coverage is adequate, and take stock of any significant new additions, increases in value, or valuable possessions you may have. Valuable items such as jewelry or artwork should be appraised periodically to allow for adjustments to coverage.

One of the biggest reasons for having homeowners insurance (other than the fact that your lender will require it) is to make sure you're covered in the event of a major disaster. It's not meant to cover small inconveniences, broken windows and low-value loss, and so increasing the amount of your deductible and taking on the cost of these minor nuisances yourself will often yield considerable savings in your premium.

It has become unfortunately very common for homeowners to be under-insured, in part due to the way insurance is sold, and many homeowners, especially in disaster-prone areas, find out when it's too late that their insurance will not cover the cost of rebuilding their lost homes. Many insurers have phased out guaranteed replacement coverage, which replaces a home regardless of cost, with "extended replacement coverage." This type of coverage will pay for losses only up to the policy amount plus a maximum added percentage, usually between 20 and 30 percent. If your home has appreciated in value more than the stated level in the policy, then you will not be fully covered for total loss. To protect yourself against underinsurance, make sure that your home is adequately evaluated by your agent. You may also consider a policy that includes a clause that automatically increases your home's insured value every year.

Many insurance companies offer a feature that automatically increases the value for which the home is insured each year. Ask your insurance company about this coverage escalator. The cost of this rider and coverage increase is then automatically built into your premium each year.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.