How Much Homeowners Insurance Coverage Do I Need?

Do you know how much your home is worth?

Determining the value of your home is the first important step to determining the amount of insurance coverage you should have. Purchase price is one of the most common and accurate ways to determine the market value of your home as long as it has been purchased recently.

In terms of insurance coverage, there are two types of values to consider. One is replacement cost and the other is actual cash value.

Replacement Cost

Replacement cost means the costs to actually replace a building of like kind and quality to the one you now own. Sometimes property values can be much higher or much lower than actual construction costs. For example if you live in an economically depressed area that has very large homes, you may find that the market value is far less than the cost to rebuild a home of similar size and quality. Conversely, your home may be in a location where property values are very high, and that the land or location provides much of the market value of the property.

Actual Cash Value

This term can be viewed as similar to the actual selling price of a home. Actual cash value means replacement cost less depreciation. As described above it is common for a very large home in an economically depressed area to have a market value that is far less than the cost to rebuild a similar house. This is due to the phenomenon of depreciation.

What to Buy

When you are reviewing insurance products to purchase, remember that you can buy homeowner's insurance on a replacement cost basis or an actual cash value basis. It is important to consider however whether you live in an area where the market value of your property is very close to or very different from the replacement cost of the home. Large differences may have a profound effect on your choice of the type of policy you need.

Liability Coverage

After you have reviewed your policy limits for your house and its contents, you next have to consider your liability exposures. The liability section of your policy provides coverage that will pay for injury or property damage that you cause to others due to your own negligence. Deciding what your policy limit will be can be very difficult and it is important that you consult with an insurance professional for advice on how much coverage is right for you.

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