When you buy a new house, it seems like there are a million moving pieces and thousands of documents that need your signature. But how closely did you pay attention when you chose your home insurance policy?
Paula Pant, founder of AffordAnything.com, a money management website, says that most people gloss over their policy and either end up paying more than they need or simply not enough.
"That's a lose-lose situation," she says. "You need the Goldilocks policy: not too much and not too little."
To make sure you're adequately covered, here are a few questions to ask to help you figure out how much home insurance you need…
How Much Will it Cost to Rebuild Your Home?
When determining how much home insurance you need, understanding the cost of rebuilding your home is crucial.
"You need enough insurance to cover the cost of rebuilding your home at current construction costs," according to the Insurance Information Institute (III). It also warns against confusing rebuilding costs with the price you initially paid for the home, as the current value and reconstruction costs could vary greatly.
Below is a list of some factors that will decide the cost of rebuilding your home, notes the III:
- Local construction costs
- The square footage of the structure
- The type of exterior wall construction – frame, masonry (brick or stone) or veneer
- The style of the house (ranch, colonial)
- The number of bathrooms and other rooms
- The type of roof and materials used
- Other structures on the premises such as garages, sheds
To gauge how much insurance you'll need to reconstruct your home, the III suggests multiplying the total square footage of your home by local building costs per square foot. You can figure out "local" costs by getting rates from contractors and talking to local real estate agent and builders.
And because there's so much to consider in determining reconstruction costs, Pant suggests walking through your home and taking pictures of everything from your countertops and cabinets to your tile and hardwood floors.
"When you submit a claim to your insurance company to justify the cost of rebuilding your home," she says, "these pictures of the components of your home will be immensely helpful in getting back the value of everything inside."
How Much are the Items in Your Home Worth?
It can be hard to know how much insurance to buy if you don't know what all of your assets are worth, says Pant.
"Many people underestimate the value of their assets because they don't conceptualize them as being worth cash," she adds.
However, Pant says it's important to have a good handle of the monetary value of your possessions as it will put you in a better position to recoup your costs should disaster strike.
To do this, Pant recommends having photographic evidence of your possessions.
"Walk around your house with the video camera, even if it's just the camera on your phone, gathering video evidence of what the interior of your home looks like. Couple that with any receipts or invoices from contractors that you've saved."
The III offers similar advice, noting that homeowners should take an inventory of their personal possessions: "You need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire."
What's Your Likelihood of Getting Sued?
Do you have a dog? Swimming pool? Trampoline?
If you said yes to any of the above, you'll want to make sure you have strong liability coverage in the event that someone is injured by your pet or while they're on your property. Being covered is good risk management – just ask Mitchell D. Weiss, an adjunct professor of finance and member of the board of the University of Hartford's Barney School of Business.
"There are three good steps to good risk management," advises Weiss. "You want to identify the risks that concern you, estimate the likelihood of their coming to pass, and determine the cost you'd incur should that thing occur."
Once you take a look at those things, Pant says it's a good idea to carry an umbrella insurance policy to protect you in case someone sues.
"These umbrella policies are generally cheap – less than $100 a year can provide coverage for up to $1 million or more dollars for lawsuits and liabilities. If someone slips on ice in your front yard and sues you, it's good to have the peace of mind that you have additional protection."
Are Earthquakes and Floods Common in Your Area?
"If you're particularly prone to hurricanes, floods, or other natural disasters, make sure you buy added insurance specifically for that. Many standard plans won't cover natural disasters that your neighborhood is most likely to experience," says Pant.
In fact, the III says that floods, earthquakes, maintenance damage (like mold, for example), and sewer backup, are a few disasters that are not covered in a standard insurance policy.
Luckily, you do have coverage options available.
"Ground water flooding is not covered by most (if not all) homeowner's insurance policies. You'll need flood insurance for that, which the government makes available," says Weiss.
He also suggests looking at wind-damage insurance limitations.
"These are used to describe an issue that's common to beachfront – or near beach – properties. Insurance companies set high deductibles for that, which leaves the homeowner to cover the difference," Weiss explains.
So, if you live in an area that's known to experience natural disasters or just bad weather in general, you'll want to add any coverage necessary to ensure you're protected.
How Much Would it Cost to Live Elsewhere if Your Home is Damaged?
You obviously don't want to think about your home being damaged to the point where it's uninhabitable, but it's an important thing to consider when you're talking insurance.
"Remember: you'll unfortunately have to live somewhere else if your home is destroyed," says Pant. For this reason, she suggests that homeowners "opt for a plan that gives you a payout, or stipend, to cover the cost of renting a home for at least six months while your current home is being fixed."
A basic, bare-bones plan usually won't cover this, but many insurance companies offer riders, or a provision of your insurance policy that is purchased separately from the basic policy, which help pay for this cost.
"Of course, adding these riders to your insurance plan also increase your premium," Pant warns. But, paying a little more a month to ensure you have place to live if disaster strikes is probably worth it.