Almost two-thirds of homeowners who suffer a complete loss of property didn’t have enough insurance to cover the tragedy. Here’s what you need to know to avoid finding yourself in a similar situation.
Know What Your General Policy Covers
Just because you pay for homeowners insurance, doesn’t mean it will cover every type of damage to your home. Most insurance policies have a natural disaster exemption clause that specifies what they will not cover. A general insurance policy will typically cover damage caused by fire, hail, lightning or explosions, but when it comes to natural disasters, coverage can be a little tricky.
Natural Disaster Exemptions
Be sure to read your policy thoroughly for specifics on what constitutes a natural disaster. For example, many policies will not include damage caused by an object being blown into your home by wind, even if it happened because of a nasty storm or blizzard. Or they will only cover roof damage caused by water, but not flooding. Most of the time, general insurance policies will not cover earthquakes or flooding so you can look into supplemental policies to cover these.
The Mortgagee Clause
Unless you have paid off your mortgage, your homeowner’s insurance policy most likely has a mortgagee or mortgage clause. This section of the policy sets up a contract between the financial institution that holds your mortgage and your insurance company. This contract protects the insurance company, should you commit insurance fraud. This clause also makes it difficult for you to receive your insurance check quickly to start rebuilding your home after a disaster which can be inconvenient.
Knowing How Much Coverage You Need
It’s important to know what your insurance covers, but you also need to know how much coverage you need. To do this, you’ll need the following:
1. Know the Cost of Rebuilding
Sometimes the cost to rebuild your home can be substantially more than what your policy covers. The insurer will often underestimate the dwelling limit to keep premiums low and entice customers. If you think the amount your policy covers are too low, it may be worth hiring an independent inspector yourself to get an estimate.
It’s also important to make sure your policy covers the replacement cost of your home, not the actual cost. Your home’s actual cost will be cheaper than replacement and will depreciate with age while its replacement cost will increase because of the rising costs of building materials and labor. You may also have to rebuild your home to meet the most current building code, which can be even more costly.
2. Know the Cost of Replacing Your Stuff
A home inventory is a necessity and something that not all homeowners do. Your current insurance policy probably caps the cost of replacing your stuff at $1,000 to $2,000, but you can buy extra coverage. Having your valuables appraised, and keeping an updated and detailed inventory can help ensure you have enough coverage for everything.
3. Get Plenty of Liability Coverage
Liability insurance covers damage done to your property, bodily injury to others by your family (including pets) or yourself. Typical coverage for most plans is about $300,000, but you can get up to $1 million if you get a separate umbrella policy.
The Bottom Line
Ensuring you have enough insurance coverage can be a tedious process, but it is a necessity and should be part of every homeowner’s emergency plan. Be sure to find out what your current insurance plan covers so if you are caught in a disaster, you are able to afford repairs. If you haven’t started reading your plan and doing a home inventory, it’s best to get started as soon as possible, before a disaster strikes.
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