UPDATED: Aug 10, 2017
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When buying home insurance, there are several factors that can impact the amount of coverage to buy. Some of these factors are outside of your control, which makes it all the more important to understand what you’re paying for and why. By understanding your coverage, you can ensure that you buy only what you need and don’t spend money on unnecessary expenses.
Banks Impact on Home Insurance
One of the first things that will affect your homeowner’s insurance is the lien holder’s interest. Your mortgage company is financially responsible for the house while there is a loan against it, and they will insist on ample insurance coverage until the mortgage has been paid in full. Ask your lien holder what the minimum amount of insurance coverage they require is, and be prepared to keep your policy at or above those limits. Dropping below can cause serious problems between you and your loan company.
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Aside from the lien holder’s requirements, you’ll have some flexibility in choosing what coverages you carry on your homeowner’s policy. You can choose to cover only the dwelling, or include protection for your land, structures and personal belongings. You can also choose whether you want a named-peril policy or one with named exclusions. The first protects you against a handful of specified causes of damage; the second protects your home against all damage not listed as exclusions. The former is cheaper, but the latter provides better protection.
Your insurance company may also give you a choice between three separate coverage levels that are based upon the value of your home:
- Cash-Value Policy – Covers the actual cash value of your house and its belongings after calculating any depreciation.
- Replacement Cost Policy – Covers the cost of your home and belongings without accounting for depreciation, thus allowing you to replace the home in the event of a total loss.
- Guaranteed Replacement Cost Policy – Guarantees the replacement of your home even if it exceeds your policy limits, thus providing inflation-proof protection.
Unsurprisingly, these policies become more expensive as their values increase.
Once you’ve determined the type of coverage you wish to buy, the price of your policy will be calculated based on your home’s value and any discounts you may qualify for. This figure may vary from one organization to the next, so it’s worth comparison shopping for the best deal and the best home insurance company.
Calculate How Much Home Insurance You Need
While there is no perfectly accurate way to determine the rebuild cost of your home, there is a method that can get you pretty close. The equation looks like this:
(Building cost per square foot) x (Square feet of the house) = (Total rebuild cost)
When making this calculation, it is important to talk with experts in your area to get an accurate view of what your building cost per square foot is. Some professionals that could be of assistance include local contractors, real estate appraisers or a local builder’s association.
Once you have a reasonable estimate of building costs per square foot in your area, determining the total amount to rebuild should be pretty easy. When estimating the total you may want to lean towards the higher side in case your policy has to cover additional costs like debris removal. It is always better to be slightly over-insured than under-insured.