Homeowner’s Insurance

Homeowner’s Insurance

It doesn’t matter what you paid for your house. What you need to insure is the cost to rebuild it. The tow figures can be wildly different.

How much you need. The conventional formula for gauging how much insurance you need on your home is to figure not how much it would actually cost to rebuild it, then tack on the extras, such as the cost of central air conditioning of a new furnace. If you don’t afford insurance for 100 percent of the house’s value, make sure you’re covered for at least 80 percent. That way, if you suffer a partial loss – say, a fire destroys your bedroom – an insurer will likely cover the entire cost. If you’re less than 80 percent insured, your insurer will only pay that percentage of partial damages.

What your options are: There are three types of homeowner’s policies: cash-value, replacement cost and guaranteed replacement cost. Cast-value insurance is the least expensive. It will pay you whatever your valuables would sell for today, which is unlikely to buy you a similar new item. Replacement cost insurance will replace the item that was lost or damaged with something new, but not necessarily the same as the one you lost, because this type of insurance usually comes with a price cap. You’ll be able to replace, say, your furnace, but not necessarily with the best model. Guaranteed replacement cost insurance has no cap and offers the best coverage. The only thing it generally will not cover is the cost of upgrading your house to meet building codes that may have changed since the policy was issued.

Residential buildings at Humber River. Photo by Elena

Homeowner’s insurance also includes liability coverage. Most policies come with large sums worth of coverage. Unless your total assets are less than that, you should probably pay a little more and get more coverage. For example, experts counsel that if you have around $500,000 in assets, you need about $1 million in liability coverage. The best way to do this is to buy an “umbrella policy” that covers both your home and car. Liability coverage comes fairly cheap. It’s unlikely that a claim against you will exceed $300,000 so underwriters can afford to give you a price break. A $300, 000 to $1 million umbrella liability policy will cost anywhere from $500 annually, the average being about $400. For another $1 million in coverage, double the price.

What to watch out for: Cash-value coverage may be a little risky, since an investment you made years ago that is still holding up – such as a good furnace – may now be worth just a fraction of its cost. Replacement-cost coverage, which usually costs 10 percent to 20 percent more, is preferable – and worth it. You should be sure to find out if there are any caps on what will be reimbursed for individual items, such as jewelry. For example, the amount you can recover if all of your jewelry is stolen may be, say, $10,000, if that is the amount of the cap for jewelry. If you have valuables that are worth more, you may want to buy more insurance by adding riders to your policy. This generally costs about $2,00 per $100 of insurance.