If you want to figure out how much coverage you should have, first you have to figure out the replacement value of your home. That’s what it would cost to repair or rebuild your home at today’s prices, including materials and labor. Insurers can help you appraise your home to find this value, but remember that it’s in their best interest to arrive at a high number. On the other hand, don’t be shocked at a number that seems higher than you expect, especially if you’re living in an up-and-coming area.
It’s wise to insure your home for 100% of its replacement value, and you may find that some insurers cap what they will cover at 20% to 25% above the insured value. You might add a rider to cover your living expenses while rebuilding takes place. And, if you own an older home, you might want a rider to cover the cost of meeting current building and wiring codes.
Many insurance companies offer to cover the market value of your home, which is the price you’d get if you sold it in the current market. Since market value includes the value of the land around your house—which rarely needs to be insured—you’ll be paying to insure a higher amount than you really need to.
And if you’re insuring your belongings, make sure they’re insured for replacement value, not cash value. The cash value of belongings is what you could get from selling them at the present time. And since expensive things like appliances depreciate over time, cash value is usually a lot less than replacement value. That means you’ll have to lay out money of your own if you want to replace destroyed or damaged items.
So while it can sometimes be a little more expensive to cover your house and belongings for replacement value, the protection it provides against the forces of inflation and the fluctuation of real estate prices is usually well worth it in the long run.
If your home is ever damaged, you’ll have a much easier time recovering money from your insurance provider if you’ve kept good records of your valuable possessions. Write down the purchase price and date, manufacturer, model, vendor, and the serial number of all your expensive items. Keeping receipts is a good idea too.
In fact, if you can record your possessions with photographs or video, you’ll be even safer. That way, if anything is damaged, you can shoot it again for comparison.
And of course, make sure to keep all of this documentation in a safe place—one other than your house. That way you’ll be able to get to it easily if anything happens to your house.