How to Insure my Home Properly: A Guide to Full Replacement Coverage

Sep 30, 2021 | Personal Insurance

Underinsurance is one of the leading issues most American homeowners face. Sixty-four percent of American homeowners are underinsured according to CoreLogic, a leading property data provider in the USA. Why is underinsurance a big deal for homeowners? Insufficient coverage puts homeowners at risk of serious financial loss in case their home gets destroyed. As a homeowner, you have the responsibility to know how to insure your home properly. A guide to full replacement coverage will help thousands of homeowners on how to properly insure their homes.

How Much Home Coverage Do You Need?

An adequate home coverage provides enough financial support to rebuild homes in case it gets destroyed. An adequate homeowners insurance policy must have the following coverages:

  • Dwelling Coverage

Dwelling coverage protects your home structures and other stand-alone structures from damage. Your homeowner’s insurance must help you repair or replace your home structures in case it gets damaged or destroyed by any covered hazards. Most homeowners prefer the ho-3 policy as it provides standard home protection. HO-3 policy replaces damaged exterior home structures at their replacement cost. The ho-3 policy has an open peril policy for dwelling coverage except for excluded hazards stated in the policy. 

Typical Excluded Perils from Home Insurance Policies

  • Floods
  • Earthquakes
  • Hurricanes 
  • Sinkholes 
  • Mudslide/Landslide
  • Sewer Backups
  • Terrorism 
  • Neglect
  • Tsunamis 
  • Nuclear accident
  • Government ordinance or seizure
  • Wildfires 
  • Riots 
  • Vandalism 

Insurance Riders

Standard homeowners insurance policies have coverage limits and exclusions. To enhance the protection your home insurance policy offers, you can pay extra and get an add-on to your policy. Insurance riders allow homeowners to increase coverage limits and cover additional hazards. 

Common Home Insurance Endorsements/Riders

  • Catastrophe Insurance

Common homeowners insurance typically doesn’t cover damages caused by some disasters. Catastrophe insurance protects homes against disasters excluded from regular home policies. If you’re living in an area prone to disasters excluded from the home insurance policy, you must secure additional protection. You can get an individual catastrophic rider on top of your homeowners’ insurance coverage if needed.

  • Water Backup Coverage

HO-3 policy doesn’t cover water damage caused by backed-up drains or sump pumps. It is way cheaper to get water backup coverage than dealing with damages associated with sewer back-ups. 

  • Building Code Coverage

Government regulations and building codes significantly influence the rebuilding cost of homes. The standard home insurance policy only pays for the stated estimated building code in your policy. If there are changes in building codes, homeowners will shoulder the additional costs in case of home reconstruction. Building code coverage will help homeowners pay for the extra costs of changes in building costs. 

  • Identity Theft Restoration Coverage

The cases of identity theft are increasing every day and it could happen to anyone. The price of an identity theft rider on top of your home insurance policy typically ranges from $8-$30 per month. This coverage covers the financial expenses of restoring one’s identity in the event of identity theft. It also helps pay legal costs associated with identity fraud. 

Insurance Companies Offering Identity Theft Coverage
  • The Hartford
  • Liberty Mutual
  • Nationwide
  • Travelers
  • Business Property Coverage

Homeowners’ insurance doesn’t protect home-based businesses. Business owners running businesses at home must secure additional coverage for their business. This policy covers business property losses against covered perils. 

  • Personal Property/Contents Coverage

Your home insurance policy also protects the contents of your home. The standard home policy protects your personal belongings against loss, theft, or damage. The downside of the ho-3 policy is, it will only pay the actual market value of your personal properties in case of loss or damage. Also, the ho-3 policy will only cover your personal belongings against specifically named perils in your policy. The typical coverage limit for personal properties ranges from 50%-70% of the policy’s dwelling coverage amount.

HO-3 policy may not provide sufficient protection for homeowners who own high-value properties. High-value items may not be adequately protected by a standard home insurance policy. To protect the value of their personal belongings, homeowners can:

  • Opt for HO-5 comprehensive form policy 

Opting for the HO-5 policy will allow homeowners to get a higher personal property coverage limit. The HO-5 policy also pays for damaged or lost personal belongings at their replacement cost. Comprehensive form policy still has its coverage limit. It may still not be enough to fully protect the value of your personal belongings.

  • Get a personal property rider or endorsement

The standard home insurance only covers personal properties against hazards stated in the policy. Getting a personal property floater on top of your home insurance policy ensures the protection of your belongings against all types of loss. Adding an endorsement will allow you to itemize all your high-value possessions. You can insure them at their officially appraised replacement value. 

Items Needing High-Value Insurance
  • Jewelry
  • Artworks
  • Collectibles and Antiques
  • Sport equipment
  • Musical instruments
  • Liability Coverage

A homeowners insurance policy protects homeowners against liabilities. This policy pays your visitor’s medical bills in case they get injured in your home. Medical payments coverage prevents lawsuits against homeowners. In the event of lawsuits, it pays for litigation costs and court awards. It covers lawsuits associated with bodily injury or property damage caused by the insured homeowners, their family members, and pets. However, this insurance policy doesn’t cover accidental injuries sustained by insured homeowners. Make sure you have enough coverage to protect you from homeownership liabilities. To ensure you have enough liability coverage, you can:

If you think you have a high risk of getting sued, it is practical to secure yourself with personal umbrella insurance. It is personal liability insurance that will back up your home and auto insurance. Every insurance coverage has policy limits. Personal umbrella insurance covers the exceeding costs of liability claims caused by any member of your family including your pets. It also protects homeowners who own boats against liability costs exceeding their boat insurance. Umbrella insurance also provides coverage for liability claims like slander, libel, and false imprisonment. Rental owners will also benefit from this policy as it provides additional coverage to your renter’s policy.

Who needs personal umbrella insurance?

  • You have a big family
  • You have a teenage driver in the family
  • You have many pets
  • You have low auto coverage limits
  • You have low home insurance coverage limits
  • You employ household workers
  • You own properties
  • You have rental units
  • You own high-risk stuff such as a swimming pool, trampoline, or hot tubs
  • You frequently host large parties
  • Additional Living Expenses (ALE)

An insured homeowner also receives financial support from an insurance company in case their home becomes unlivable because of a covered loss. It pays for incurred expenses exceeding the homeowner’s average monthly living expenses. Additional living expenses include hotel bills, restaurant meals, and other costs homeowners spend while their home is under renovation. 

  • Higher coverage for ALE

If your household is big, you may need to increase your ALE coverage amount. A higher ALE limit ensures adequate financial support in case you need to move out of your house if it becomes unlivable. Talk to a company representative about your option for higher ALE coverage.

Full Replacement Cost VS. Actual Cash Value

Depending on the type of home insurance policy, homeowners can insure their homes either at full replacement cost or actual cash value. The cost of rebuilding homes changes due to increasing construction costs. High inflation rates, increasing material and labor costs have a huge impact on the construction cost of homes. Full replacement cost policy provides homeowners enough financial support to rebuild their homes. Actual cash value is the purchase price of your home when you constructed it minus depreciation. To ensure you will have enough money to rebuild your home in case it gets destroyed, go for full replacement coverage. The protection and security it provides will outweigh the increase in premium rates.

Difference Between Replacement Cost and Guaranteed Replacement Cost

Sometimes, having your home insured at replacement cost is not enough to ensure complete protection. The rebuilding cost of homes is increasingly changing year by year. With all the things happening in our country, reconstruction costs are expected to climb up further. Having a guaranteed replacement cost coverage on top of your home insurance policy guarantees complete protection. This coverage extends the limit of your home insurance coverage when the replacement cost exceeds the estimated reconstruction cost of your home. Extended replacement cost coverage offers an extra 20%-25% of the replacement cost of your home. Having a cushion for home rebuilding costs prevents sudden financial expenses to homeowners.

House is an expensive investment. Insuring your house with a full replacement cost policy ensures the protection of your investment. With the continuous changes in our climate, natural disaster is just around the corner. Manage your risks and liabilities to prevent unexpected financial loss. 

Here at AIS

We have an excellent team of insurance experts to assist you in getting suitable coverage according to your needs. We represent various major insurance companies that have proven to provide quality protection. Call us now to know more about the insurance products we offer.