Understanding Homeowners Insurance Coverage Limits

Just as it’s important that you have homeowner’s insurance, it’s also important that you insure your property for the right amount. If you over insure your house, you will end up overpaying. And if you under insure it, you could find yourself facing a substantial shortfall if the worst transpires and your house is damaged by a fire, flood, storm, etc.

So, how much cover is enough? And how can you determine the right amount for your circumstances?

The first key thing to note is that the sum to be insured should be the rebuild cost of your house, not how much it’s worth or how much you paid for it. The reason is that if your house should happen to be destroyed, the insurers will only pay for the costs of rebuilding it. If you’ve insured if for more than the cost of rebuild, therefore, you will be overpaying on your premiums.

Estimating the cost of a rebuild, though, will probably be pretty challenging for most people. The good news though is that there are websites that can help you with such estimates. One such website is the Building Cost Information Service, whose website has a rebuild cost calculator, http://calculator.bcis.co.uk/index.cfm#calculation

Remember, though, that’s important to review the amount of coverage that you have periodically. So, whilst the rebuild cost is unlikely to change much between 2007 and 2008, maybe by 2017 it might be substantially more. That would act as your cue to up your coverage amount to make sure that you remain fully insured.

When people refer to homeowners insurance, they usually mean the Buildings insurance part which covers damage to the structure of your house and sometimes also to accompanying structures such as out-houses, garages, etc. Alongside buildings insurance, however, people also often take out Contents insurance. As the name suggests, contents insurance covers items that you own in the house, as opposed to the house itself. So it will cover items such as computers, clothes, paintings, etc. The correct amount of contents insurance will depend entirely on your personal circumstances. You should make a list of all the valuable items that you own and then make an assessment of their value. This is what you could get for them if you sold them, not what you paid for them.

Insurance is an aspect of personal finances that people often feel reluctant about. There can be resentment about paying a monthly premium for something that we may never need. However, it should be a fundamental part of your financial portfolio, as it helps to protect the value of some of your most valuable assets. And getting the amount to be insured wrong may prove a costly mistake in the long-run, either through overly high premiums or by not fully meeting the cost of a rebuild should the worst happen and your house is destroyed.