Home insurance can be confusing, especially when it comes to determining how much home insurance you need. Not having enough home insurance can be almost as bad as not having any. Many people think they have the right amount of coverage, and so are blindsided after a disaster when they’re not covered like they originally believed.
Calculating the Replacement Value of Your Home
The first step is to determine the total replacement value of your home. The total replacement value of your home is how much it would take to completely rebuild after a disaster, which is not the same as the price you paid for the home.
You may use online tools or hire a professional appraiser to help calculate your home’s value. Home replacement value is typically calculated by multiple factors, such as:
• Value of the home’s floors, roof, improvements and other aspects of the home
• Other properties nearby
So, why do you need to know the replacement value of your home? This is in part to know how much it would cost to replace the home completely, but this is also due to the 80% rule in home insurance.
What is the Eighty Percent Rule in Home Insurance?
There are rules in home insurance that can be somewhat hidden, especially when it comes to how and when compensation is received. One of these rules is the 80% rule. Essentially, homeowners must purchase and carry at least 80% of their home’s total replacement value in home insurance.
For example, say your home is worth $400,000. You carry $240,000 in home insurance. A tornado sweeps in and does $140,000 worth of damage. Since $240,000 is more than $140,000, you may think all of the damage will be covered. Unfortunately, this may not be the case. Compensation in this case is calculated by dividing the amount of insurance carried (in this case, $240,000) by the amount that should have been carried, which is 80% of the home’s total replacement value. $240,000 is 60% of the home’s total replacement value of $400,000. 80% of the home’s replacement value is $320,000. So, this would mean divide $240,000 by $320,000. This is .75, which is then multiplied by the amount of damage. In this case, $140,000. In the end, you would receive around $105,000 in compensation for the damages. Because you didn’t have 80% or more of your home’s replacement value in insurance, you would be left paying the remaining $35,000 out of pocket.
Keep in mind that 80% is the minimum amount of insurance recommended. Most insurers recommend that you carry 100% of your home’s replacement value in home insurance.
How Much Personal Liability Should I Carry?
The 80% rule in home insurance only applies to the property coverage of a policy. Home insurance also comes with limits of general liability. General liability insurance covers lawsuits filed against the policyholder or a covered family member concerning bodily injury or property damage. As with property insurance, the amount of liability insurance needed varies per household.
Homeowners who host a lot of parties, for example, may need higher limits of liability insurance. A basic home insurance policy covers around $100,000 in general liability. There is no 80% rule with liability insurance, so the amount of liability needed should instead be calculated on how likely it is a lawsuit could be filed against the policyholder or a family member. Homes with pools and trampolines may require higher liability limits due to the increased risk. Homeowners who host events or participate in risky activity may want to insure themselves with more liability, as well.