Insurance Coverage: Homeowners' Optimal Percentage

The percentage of house insurance you should have depends on several factors, including the cost of rebuilding your house, the value of your belongings, and the liability insurance you require.

The foundation of home insurance is dwelling coverage, which pays to rebuild or repair your house if it is damaged by a covered problem, such as a fire or tornado. Other structures coverage and additional living expenses coverage are also related to dwelling coverage and typically default to 10% and 20% of your dwelling insurance limit, respectively.

Personal property coverage, which insures your belongings, is generally set at 50% to 70% of your dwelling limit. Liability insurance, which covers injuries and property damage you accidentally cause to others, should be purchased in an amount that covers what could be taken from you in a lawsuit.

Your home insurance deductible, the amount subtracted from a claim check, also influences your costs. A higher deductible will result in cheaper insurance costs.

Dwelling coverage

When determining how much dwelling coverage you need, it is important to consider the cost of rebuilding your home from scratch rather than its market value or purchase price. This is because the rebuild price, also known as the "replacement cost value", is usually different from the home's market value. To calculate the replacement cost value, you can consider factors such as the size of your home, local building costs per square foot, and the price of construction materials and labour. You can also use an online replacement cost calculator or consult with a licensed insurance representative.

It is recommended to review and update your dwelling coverage amounts annually, as the replacement cost can increase over time due to inflation, natural disasters, and other factors. Additionally, it is important to note that dwelling coverage does not protect against damage caused by floods, earthquakes, sewer backups, or lack of maintenance. For coverage against these perils, separate policies or endorsements may be required.

To ensure you have adequate coverage, consider purchasing extended replacement cost or guaranteed replacement cost endorsements. Extended replacement cost provides an additional percentage of coverage if your dwelling coverage limits are not enough to cover the cost of rebuilding. On the other hand, guaranteed replacement cost provides unlimited coverage to rebuild your home, regardless of the original coverage limits.

Other structures coverage

The limit for other structures coverage is typically set at 10% of your dwelling coverage limit. For example, if your dwelling coverage limit is $300,000, your other structures coverage would be $30,000. However, this amount may not be sufficient if you have large or numerous detached structures. In that case, you may need to increase your other structures coverage limit or add more coverage to your policy.

The specific problems covered by other structures coverage vary by policy. Most policies cover problems such as fire, hail, wind, and vandalism. However, other structures coverage typically does not cover damage caused by heavy rain, flooding, or earthquakes.

When determining how much other structures coverage you need, consider the size and number of detached structures on your property. If the replacement cost of these structures exceeds your coverage limit, you may need to increase your limit or add additional coverage.

Personal property coverage

When it comes to reimbursement, insurance companies will pay to repair or replace your belongings in one of two ways: actual cash value (ACV) or replacement cost value (RCV). ACV takes into account depreciation, while RCV is based on the current market value. Most companies default to ACV, but RCV may be available as an option or included automatically for certain items.

To determine how much personal property coverage you need, it is recommended to create a home inventory by taking detailed photos or videos of each room and making a list of all your valuable possessions, including their value and identifying details. Once you have a total value for your personal property, you can round it up to the nearest $5,000 or $10,000, which will give you the minimum personal property coverage you need. If this amount exceeds the coverage provided by your current policy, you may need to purchase additional coverage.

Loss of use coverage

• Additional Living Expenses: This covers the cost of temporary housing, such as hotel stays or home rentals, if your home becomes uninhabitable due to a covered reason, such as fire or storm damage. It ensures that you have a place to stay while your home is being repaired or rebuilt.
• Fair Rental Value Coverage: If you rent out a part of your home and it becomes damaged, this coverage will compensate you for the lost rental income during the period of repairs.
• Prohibited Use Coverage: This covers displacement costs if you are unable to access your home due to emergency measures or government orders. For example, if there is a wildfire and local authorities issue a mandatory evacuation, prohibited use coverage will reimburse you for the extra living costs incurred during that time.

Typical Expenses Covered by Loss of Use:

• Public transportation or parking costs.
• Moving and storage costs.
• Additional food expenses.
• Temporary housing costs, such as hotel or motel stays.

It is important to note that loss of use coverage does not cover every expense. Here are some things that are usually not covered:

• Ongoing expenses such as your mortgage, rent, or insurance payments.
• Expenses that are not directly related to your displacement, like utilities.
• Luxury accommodations or expenses that exceed your normal standard of living.
• Expenses resulting from routine home maintenance, renovations, or pest control.
• Expenses incurred due to uncovered perils, such as flood damage (unless you have separate flood insurance).

The amount of loss of use coverage you need depends on several factors. Loss of use coverage is often based on a percentage of your dwelling coverage, typically ranging from 20% to 30%. You should consider the cost of living in your area and the potential cost of renting a similar home for a temporary period. If you feel you need more coverage, you can usually increase your limit for an additional cost.

How to File a Loss of Use Claim:

To file a loss of use claim, follow these steps:

• File promptly: Submit your claim as soon as possible to expedite the process and increase your chances of a quick settlement.
• Contact your insurance provider: Many companies allow you to start the claim process online, through an app, or by calling their claims line.
• Keep all your receipts: You will need to provide documentation of your additional living expenses. Keep receipts for even small expenses, as they may be reimbursable.
• Record your normal living expenses: Insurance companies will often request a list of your standard living costs to determine the additional expenses incurred due to displacement.

Personal liability coverage

Personal liability insurance covers a variety of situations where you may be legally responsible to pay for something that happened to someone else on property that you own, and in some cases, on property that you don't own. For example, if someone falls down your stairs, or your child accidentally throws a ball through a neighbour's window, you may be held legally responsible for the damages caused. Many homeowners insurance policies provide a minimum of $100,000 in personal liability coverage, with the option to purchase more if needed.

Personal liability insurance also covers medical bills resulting from a visitor’s injury at your home, as well as legal expenses resulting from lawsuits that seek to recover damages that are potentially covered by the policy. It also covers bodily injury or property damage that results from your negligent acts or omissions, as well as bodily injury or property damage caused by your pets.

It's important to note that personal liability insurance does not cover everything. For example, it typically does not cover liability resulting from an automobile accident, bodily injury or property damage caused intentionally by you or a family member in your home, or injuries or damages sustained by you or family members in your home. Business activities or claims related to your profession are also usually excluded from personal liability coverage.

The cost of personal liability insurance can vary depending on your specific circumstances, such as the location and age of your house, and the coverage limits you choose. It is recommended to review your policy limits each year to ensure you have adequate coverage.

According to ValuePenguin, the cost of being fully insured is approximately 20% of a person's income per year, with health insurance being the most expensive coverage for most people. On average, renters insurance only makes up 3% of an individual's yearly insurance expenses, while homeowners insurance accounts for 14%.

Frequently asked questions