Home Insurance: What to Know About Yours

A few days ago I wrote about why most homeowners under-insure their home. But most folks believe that their home insurance policy guarantees to pay for all costs regardless of the limits written in their policy.

Today, most standard homeowners insurance policies no longer provide "guaranteed replacement cost" coverage. Back in the good old days policies provided homeowners peace of mind that their home would be replaced no matter what the coverage limits were in a policy.

But in an effort to limit loss exposure, most insurance companies have changed the language in their policies, and sent their customers a "notice of change of coverage" in the annual policy updates.

These little notices include a big change in coverage. It's doubtful that most homeowners fully understand the importance of this change, or even read the notice.

Most homeowners policies today provide "extended replacement cost" coverage or "specified additional amount of insurance". This only provides coverage up to the dwelling limits specified in the policy plus an additional amount of 20 to 25 percent, and NOT a penny more. This places more responsibility on homeowners to ensure that they have adequate dwelling coverage limits in their homeowners insurance policies.

Some states, such as California, have become so concerned about the under-insurance problem that they have passed regulations requiring additional training for agents and insurance companies to change policy language to state that policies provide "limited replacement cost coverage".

Will Your Insurance Pay to Rebuild Your Home?
Every homeowner who has not reviewed their home insurance in a few years should pull out their policy and ask themselves this question: Will my insurance pay to rebuild my home?
Call your insurance company or agent and ask them the same question. Some insurance companies may offer to do a home replacement cost analysis based on the owner's statements about things like the number and type of rooms, the quality level of the existing construction and the homes special features. Ideally, your insurance professional should visit the home and consider the specific risks to the home, local market conditions and current building codes that could increase the costs of replacing the home.

I advise folks to also use the online tool at AccuCoverage to calculate your homes replacement cost. You can input information for your home and use their free worksheet in advance to make the process easier and more complete. For about eight bucks you can print an AccuCoverage report that includes an estimate the insurable replacement cost of your home based on the same reconstruction cost data for your local area that is used by much of the insurance industry. If your report indicates a replacement cost that is 120 percent more than the dwelling limits in your policy, call your home insurance company and increase your dwelling limits.

Once you've increased your home's coverage, you will need to revisit it every several years, or anytime you have made improvements that increase the value of your home.

Many insurance companies offer an automatic dwelling coverage escalator. This feature automatically increases the dwelling limits in the policy each year. Ask your insurance company about this add-on which can cost an additional $50 or so per year. It's a small amount to pay for additional peace-of-mind.

Check back in a few days when I'll write about other coverage and features you should have in your home insurance policy.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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