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How Much Homeowners Insurance Do You Need

hi-5Although purchasing a homeowner’s insurance policy is not required by law, you probably won’t be able to get a mortgage without it. But there’s a big difference between having a policy and having a policy that protects your investment. Unfortunately, most people don’t know how much homeowners insurance coverage is needed to protect them in case of a loss.

In most cases, homeowners purchase what are known as HO-3 policies. This type of insurance covers a broad range of potential problems, such as lightning damage and faulty electrical systems. Although these types of policies cost a little more than HO-1 and HO-2 policies (which cover very specific types of risks), most homeowners and banks prefer the broader protection these policies offer.

These types of policies also give you more options, including choosing whether you prefer replacement cost or actual cash value for your lost items, and they allow you to determine how much coverage you want. These amounts matter the most in two areas: the compensation for the loss of your home and your liability coverage.

Loss of Your Home

If you lose your home, you need enough money to rebuild it. First, get an estimate from a local builder so you and your insurance agent know how much such a project would cost. With most insurance companies, you’re going to get three coverage options here:

  • Actual cash value
  • Replacement cost
  • Guaranteed replacement
Although the actual cash value option may be cheaper, you may not receive enough compensation to rebuild or repair your home. The last two options offer the most protection for homeowners. Slash Your Homeowners Insurance Premiums. Search for Lower Rates.

Replacement cost policies pay to rebuild your home based on its value at the time you took out the policy but if the costs of materials or construction in your area increase you may still not have enough to cover the expenses. Guaranteed replacement coverage, on the other hand, pays for you to rebuild or repair your home but usually sets the maximum payout at 125% of your home’s value. This type of coverage costs more but does provide the greatest peace of mind and protection.

Liability Coverage

Homeowners’ policies also protect you in case someone gets hurt on your property. If your daughter’s friend falls down your stairs, for example, your policy covers the damages you would normally have to pay out-of-pocket. Most policies will offer liability coverage up to $300,000. You typically have the option to purchase additional liability coverage as well.

To determine an adequate coverage amount, consider the risks visitors might face in your home. If you own a dog, for example, you may need more coverage because of the risk of bites or other injuries. Swimming pools, stairs, and other high-risk parts of your home could also lead to a greater need for protection. On the other hand, if you live in one-story home with no pets and have few visitors then you would probably be safe choosing less liability coverage.

Remember that you need to find a balance between affordable premiums and sufficient coverage. Otherwise, you may not be able to afford your policy or the consequences of not having enough protection.