Why Underinsuring Your Home Can Be A Costly Mistake
May 18, 2023
Your home is one of the most important investments you can make, and homeowners insurance is vital to making sure that investment is protected. But is your current homeowner’s insurance enough to fully cover your home in case of disaster?
The answer might be more complicated than you think. According to recent data from Nationwide, approximately two out of three homes in America are actually underinsured:
The average underinsurance amount is about 22%, though some homes are underinsured by 60% or more.
With many people struggling in the current economy, many are opting for cheaper homeowners insurance policies in the interest of saving some short-term money. But if a major catastrophe damages or destroys your home, that could turn out to be an expensive mistake — falling short on an insurance claim could cost you tens of thousands of dollars out of pocket, and proper repairs could fall entirely out of your financial reach.
So why are so many homes underinsured? While some homeowners do cut corners on their policies, that’s not the only reason why your home might not have enough coverage. For example, if you made major additions or modifications to the home — such as home renovations, valuable jewelry, artwork, or that pool you’ve always wanted — and didn’t notify the insurance company, your policy likely wasn’t updated to cover those new assets. Also, existing policies may have been enough at the time they were taken out, but might not have kept up with inflation. In the current economic climate, it’s perfectly possible for the cost of parts and repairs to go up, while the policy’s coverage does not.
Another reason you might be uninsured: you’re simply not covered for certain kinds of damage. Every homeowner’s insurance policy has certain things it will and will not cover. For example, most homeowners insurance policies do not cover the following:
- Flooding
- Earthquake
- Pest infestations like termites
- Mold
- Power surges
- Intentional damage
- War and government action
- Home-based business liability
- and more
If one of these perils should happen to you, it’s most likely your insurance company won’t pay out any claim you make — leaving you entirely on the hook for the costs of addressing the issue.
How Much Coverage Do You Need?
In the case of perils that are not covered by your homeowner’s insurance, you do have options. For example, if you live in an area with a high risk of floods or earthquakes, you could take out additional insurance for those events. If you can’t afford additional insurance for specific perils, you should be prepared to pay those costs out of pocket if your house takes damage.
When in doubt, take stock of your situation and make an informed decision. Kristine Lee at The Zebra has a few tips on how much home insurance coverage is needed.
What is the revamp cost of my home, including segregated structures (at the present rate for materials and labor)?
How much will it cost to replace my belongings and personal property?
What is the value of my personal assets in case someone sues me?
How Can You Ensure You’re Adequately Covered?
If you think your home might be underinsured, there’s no cause for alarm. In all likelihood, you can take steps to make sure you’re adequately covered. Some places to start include:
- Get a valuation of the property. If you took out your homeowner’s insurance policy ten years ago or more, the value of your home may not be the same — in fact, it likely isn’t.
- Review the contents of your home. If you have any expensive art, home business assets, jewelry, or other high-value possessions, talk to your insurer about additional coverage for those.
- Likewise, if you’ve made any major renovations or additions to your home, talk to your insurer and make sure you’re adequately covered, as these will most often add equity and value to the house.
- Another way to make sure you have enough coverage is to make sure your home is protected against damage in the first place. For instance, you could install reinforcements to protect from fire, earthquake, flood, or other types of natural disasters. This might mean storm windows and doors, fire-resistant materials for your house’s construction, and more.
- Don’t be afraid to shop around and compare home insurance quotes. There are plenty of free tools online to help you pick the right homeowner’s insurance policy for you. Don’t just go with the cheapest policy you can find — shop and compare to make sure you get all the coverage you need.
- Finally, consider taking out more coverage than you actually need. Taking the bare minimum might save you a few dollars, but taking out more coverage than your home is worth at the time could end up being a godsend if you forget to update your insurer on changes and updates.
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