What is the biggest financial risk you face? People often think of their investment portfolio or 401(k), but your biggest asset may be the equity you have in your home. The catastrophic fires and devastating losses the past few years have refocused homeowners on insurance. Through my personal experience of losing my home in the Tubbs Fire, I have learned a great deal about how homeowner’s policies work, what the relevant coverages are, and steps to take in the claim process.
How do you know if you have adequate coverage?
The best way to protect yourself is to do an insurance review. I lucked out in that I had mine reviewed after the 2015 Lake County fires which helped me tremendously, as I would have been underinsured if I hadn’t done the review. You want to cover rebuilding your home, replacing your belongings, reimbursing yourself for temporary living expenses, and protecting yourself from injuries and damages that happen on your property (or are caused by you).
Here are some items to check…
This pays for the repair or rebuilding of your home (less the land and excluding damage by special “unnamed” disasters such as flood and earthquake) and should be reviewed upon making improvements, or every few years as costs rise. Your insurance agent can give you an estimated per square foot replacement cost to make the calculation (the square footage of your home x the estimated per square foot cost to rebuild). If it is a custom home, having a trusted contractor estimate the cost of construction is a wise move as well.
Enhanced Dwelling Protection
Most insurers offer extra coverage for your home’s structure in case your dwelling limits aren’t enough or there is a spike in construction costs like we saw after the 2017 fires. Having enhanced dwelling coverage helps ensure you don’t have to dip into your savings to rebuild your home.
This covers structures that are not attached to the house (garage, tool shed, etc.) and is based on a percentage of the dwelling dollar amount. Be sure you inquire, however, because such things as an elaborate garden structure may not be covered unless you specifically insure it.
Most policies provide 50%-70% of the dwelling coverage dollar amount to replace belongings that are damaged or stolen – everything from furniture to your clothes. Trees and plants may have only minimal coverage, so if you have elaborate landscaping, you should discuss this with your agent. Be sure you keep a current inventory of your belongings for claims submission (photos & videos are a great idea). It is important to have replacement value and not cash value coverage, which can factor in significant depreciation, meaning you will not be reimbursed enough to replace the item.
Loss of Use
Also known as Additional Living Expenses (ALE), this coverage is often 20%-30% of your dwelling dollar amount. It pays for the additional cost of living expenses like temporary relocation and meals if your home is damaged or destroyed.
Note that policies may limit full coverage of jewelry, fine art, etc. so consider getting a professional appraisal and discuss special coverage “riders” with your agent.
Covers against lawsuits for bodily injury or property damage caused by the policyholder or family members, including pets.
Businesses require commercial insurance and are not covered by standard homeowner’s policies.
The above are some of the components of a homeowner’s policy. It’s important that you review your policy with your agent or a professional to make sure you are adequately covered. Homeowners insurance can be costly but remember it gives you considerable bang for your buck. After all, the premium you pay will be a fraction of the amount it would cost to rebuild your home from the ground up and replace your possessions.
CFP® AEP®, Managing Partner, Senior Wealth Advisor