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Is my house underinsured? How to find out and eight ways to fix it

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House with coins and calculatorBeing underinsured is a common issue for homeowners -- and they don't even know it until it's too late.

Most homes are underinsured. Nationwide estimates that about two-thirds of American homes are underinsured. Some homes are underinsured by at least 60 percent and the average is about 22 percent. CoreLogic estimates that three out of five American homes are underinsured by an average of 20 percent.

Being underinsured means that you don't have enough home insurance coverage to protect you if your home is damaged or destroyed in a fire or another disaster. Not having enough insurance can result in you paying a large part of the repair construction costs. For example, if you're underinsured by 20 perecent, and your house costs $200,000 to replace, you’d be short by $40,000.  

Being underinsured could also mean losing your house if you get sued.

Keith Balsiger, president of Balsiger Insurance in Reno, Nevada, said rising construction costs is one reason why so many homeowners become underinsured.

Carole Walker, executive director at Rocky Mountain Insurance Information Association in Greenwood Village, Colorado, said one way to make sure your home is insured properly is to have coverage to handle the cost to repair and rebuild your home. "That's not the market value, but the cost to rebuild in today's dollars -- your insurance company doesn't have an investment in what you can sell it for, but rather current repair and rebuilding costs," Walker said.

How do you make sure your home isn't underinsured? Walker said the most common mistake homeowners make is not reviewing your home insurance policy each year. Here is a checklist with tips for ensuring you have sufficient coverage:

 

Avoid home insurance coverage minimums

If you have a mortgage, your lender will require you have a certain minimum amount of homeowners insurance coverage. Depending on the terms of your financial contract that amount may be the same as the unpaid mortgage balance or a higher amount that would be enough to cover replacement costs of the home. The minimum liability protection you can get is usually $100,000, but experts recommend three times that. That means home insurance coverage equal to your mortgage balance with minimum liability limits is often not enough to fully protect you.

Balsiger said skimping on coverage isn't worth it. You can save $50 or $100 by cutting your coverage, but your home is your largest investment and asset. It's wiser to look for other ways to save. For instance, see how much you'd save by raising your home insurance deductible. An Insurance.com rate analysis found that by jumping from a $500 deductible to $2,500, the average savings is $260, though in some states you can save more than twice that much. You can also bundle your home and auto policies with the same company. That usually means a discount.

Notify your insurer and update your policy if you do home renovations or add features

Improving your home adds to its value, but can also mean you become underinsured. So, it's important to notify your insurer when you improve your house and increase coverage to protect your home adequately.

One in four remodeling projects increases the value of a home by more than 25 percent, according to the Independent Insurance Agents and Brokers of America. Chances are you may need to increase your coverage to reflect the impact of renovations on your home's value.

Even if you don't renovate or remodel, but add a deck, pool, trampoline or woodstove to your property, you should tell your insurance company. Failing to do so could mean your policy won't pay out for damages or injuries from such new features.

Update your personal property inventory

Make sure you adequately cover your personal items, and that the inventory of what’s inside your house is current.

The contents of your house are protected under the personal property, or “contents” component of your policy. Coverage limits are usually set as a percentage of the policy limit for your home, usually 60 percent to 70 percent, or as a percentage of the replacement value of your home, typically 50 percent. Typically, personal property coverage carries the same deductible as the dwelling coverage portion of your policy due to most homeowners having an "all-perils" deductible.

Personal possessions that are worth a lot, such as jewelry, art, antiques, guns and coin collections, are usually limited to $2,500 worth of coverage. If your items’ worth exceed this amount, it’s wise to purchase extra coverage, called a rider or endorsement, up to the limit on these types of items. You'll need to provide receipts and appraisals to document replacement costs.

"Document your personal belongings by creating a home inventory with photos and receipts. Most insurance programs provide downloadable home inventory apps that make the process easier and will help take the headaches and heartaches out of the claims settlement process," Walker said.

 

Assess your exclusions and endorsements

You should also review your exclusions and endorsements, the parts of your policy that give or take away coverage. Endorsements can ensure you are fully protected and are typically very affordable. Reviewing your exclusions will help you determine how to protect your home from severe weather and if you need to buy more liability insurance.

Endorsements

You can get an endorsement for expensive personal possessions, as explained above, but there other important ones you should know about.

Sewer and sump-pump backup: For instance, adding sewer and drain backup coverage to your homeowners policy is wise. It is one of the most common homeowners claims, averaging $10,000-$20,000 in expenses, and it is almost always excluded from a basic policy.

Special personal property coverage: Damage to your electronics from what insurers call a “named peril,” or lightning, fire, or water damage that’s not from flooding, is covered under a standard policy. But if your electronic devices are zapped by a power surge, it’s not. But you can get a special property endorsement for such situations.

Home-based business: If you have just a simple home office, you can typically get a home-based business endorsement to cover your office equipment and related property. But if you have a daycare, dog grooming or other type of full-fledged operation, you will need a separate commercial business property to ensure full coverage.

Exclusions

Dog breeds: Typically a home insurance policy's liability coverage has included dogs. But a growing number of home insurers now exclude "dangerous" breeds from liability coverage due to the increasing amount – and cost – of dog bite claims. Others require dog owners to sign liability waivers for dog bites. If you have a dog, be sure to check your policy to see if it is excluded from liability coverage or not.

Some insurers, including Liberty Mutual, Nationwide and Amica, don't discriminate based on breed and evaluate your dog based on its history and behavior. Also, some states, such as Maryland, Pennsylvania and Michigan, don’t allow insurance companies to deny coverage to owners based on a specific breed of dog. However, that doesn't prevent insurance companies from charging higher premiums, so some dog owners may still have difficulty getting coverage.

Wind and hail: Damage from wind and hail is covered under standard policies in some states, but in some others, it is not. Insurers in states where hurricanes and tornadoes are common sometimes put wind and hail exclusions in home policies. That means damage isn’t covered unless you buy separate wind and hail coverage. There are also exclusions for cosmetic roof damage from hail, which means if the roof is structurally damaged, you can file a claim, but if it is dinged up, you can’t. Be sure to check your policy for wind and hail exclusions to be sure you’re sufficiently covered.

Buy replacement coverage, check it against inflation

Replacement coverage for your home and personal belongings help make sure you can properly repair and rebuild your home -- and replace items damaged, destroyed or stolen.

Another type of coverage is called actual cash value (ACV). ACV costs less than replacement coverage, but it also doesn't cover you as much as replacement coverage. Instead, ACV deducts the value of your home because of depreciation.

What that means is it will pay for the current state of the home. So, if you have a 40-year-old home, it will pay you what your 40-year-old home is worth if it's damaged or destroyed. Not what it would cost to replace that home with a new structure.

Balsiger suggested homeowners meet with their broker to review the replacement cost of your home. "While most policies have a built-in inflation guard it is very likely that it has not kept pace with the increasing cost to build," Balsiger said.

A few years ago, builders sold new homes for under $100 per square foot. Those same new homes sell for $150 per square foot or higher, he said.

"This means that the cost to rebuild is now 50 percent higher. One way to do a self-check is to research what new homes are selling that are similar to yours. Compare it to the coverage you have to see if you are properly insured. Keep in mind that a rebuild is usually more costly than brand new construction. This is due to clean up/teardown of the site," Balsiger said.

 

Make sure you have enough liability coverage

Home insurance covers you if you, a family member living with you or even your dog is to blame for injuries or property damage.

Liability coverage helps with property damage, medical bills, pain and suffering and lost wages. This type of coverage can also cover you for death benefits and legal costs.

Liability coverage protects your greatest liability -- your home -- and other belongings if you get sued, so it's important that you have enough coverage.

"We live in a litigious society and you need to consider what could be at stake if you had a claim or lawsuit filed against you when someone is injured on your property or if you, a family member of a pet is responsible for hurting someone or causing damage to someone else's property," Walker said.

Liability limits go from $100,000 up to $500,000, with $300,000 the recommended amount to ensure sufficient coverage. Buying more liability protection is generally affordable. For example, a policy with $100,000 in liability and $200,000 in dwelling coverage with a $1,000 deductible costs an average of $1,228. The same policy with $300,000 liability protection costs $1,244, just $16 more. You can compare rates by ZIP code for 75 coverage levels with varying deductibles by using Insurance.com’s average home insurance rates tool.

If your assets exceed $500,000 you may want a separate umbrella policy. Umbrella insurance protects you up to $5 million depending on your policy.

Being uninsured because you don't have enough liability insurance can mean losing your house, so it's critical that you have enough coverage.

 

Get the right value to rebuild your home

To make sure that you have enough coverage, you will have to figure out the replacement value to rebuild your home.

Walker suggested multiplying the local building costs per square foot by the total square footage of your house. You can ask a local builders association or a reputable builder for the local building costs. Also, check with your insurance agent or company.

She said factors that will determine the cost to rebuild your home include:

  • Construction costs
  • Square footage
  • Types of exterior wall construction, such as frame, masonry or veneer
  • House style, such as a ranch or colonial
  • Number of rooms and bathrooms
  • Type of roof
  • Features like garages, fireplaces and exterior trim

 

You may need flood insurance

Being underinsured goes beyond a standard homeowners insurance policy.

Even if you don't live in a flood zone, your home may need flood insurance. A standard home insurance policy doesn't protect your home if it floods. Instead, you need to buy a separate flood insurance policy through either the National Flood Insurance Program (NFIP) or a private insurance company that works with the NFIP.

Mortgage lenders require people who live in flood zones to get home insurance, but up to 20 percent of flood claims come from low- to moderate-risk areas, Walker said.

"It is important to understand what flood insurance covers and what it doesn't, as well as what is considered flooding. For example, unlike homeowners insurance, there are separated policies for contents and structure damage," Walker said.

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