Choosing the Best Homeowners Insurance Coverage

December 22, 2021
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If you own a home or investment property, you will need to have homeowners insurance. That should go without saying. How much insurance to get and which coverages are best may depend on where you live, the size of your property, the value of your property and other factors.

Homeowners insurance is not something people typically think about as part of their financial plan, but it is important. You have to be prepared and covered in case something bad happens. Here are some items to consider when setting up your coverage for 2022 and beyond.

Natural Disasters

Most standard homeowners policies provide coverage for natural disasters like wildfires, lightning, hail and explosions. Fire coverage can be tricky, especially here in Southern California. Some homes in high-fire-risk locations can require an extra level of insurance coverage. In addition, more accidental home fires occur in the winter season than any other because of people running heaters and fireplaces. Always read the fine print when it comes to fire coverage to make sure you have what you need.

Floods, mudslides and earthquakes generally aren’t covered by standard insurance plans. Additional earthquake coverage is a smart idea in SoCal as we never know when the “big one” will hit. Mudslides are another concern here, especially in those same high-fire-risk areas. Fires burn through the foothills and make the soil susceptible to mudslides when it rains.

Major Home Damage

Your insurance provider will generally recommend a coverage limit for the structure of your house in case of major home damage. Still, it’s worthwhile to educate yourself. Make sure you are not overpaying for something you don’t really need and paying for the specific coverages and amounts that make the most sense for your property.

Two major factors that affect home rebuilding costs include:

  1. Local construction costs
  2. Square footage of the home structure

You can get a decent estimate for necessary coverage by multiplying the square footage of your home by local building costs (based on an average per-square-foot price). There are different resources you can use to determine this, including your real estate agent, your insurance provider and local builders associations.

There are some other factors that can affect rebuilding costs:

  • Exterior construction materials (framing, brick/stone, veneer, siding, etc.)
  • Style of house
  • Number of stories
  • Roofing design and materials
  • Floor plan
  • Additional structures on property (garages, sheds, patios, etc.)
  • Any special features that are more expensive to rebuild/replace
  • Home improvements/upgrades

Personal Possessions

Next, you have to figure out how much homeowners insurance coverage you need for your personal possessions. Take a careful inventory of your belongings and know the actual cash value it would cost to replace anything that is lost or stolen. Consider replacement cost coverage as part of your policy. It may cost approximately 10% more on average, but may be worth it for better replacement value for your personal possessions.

If you have unique collections or ultra-high-value possessions, you may seek additional insurance outside of your standard homeowners insurance policy. Get these items appraised by an expert and covered as needed. Odds are your standard insurance carrier will not value them the same as someone in the collector world.

Additional Living Expenses

Understand how Additional Living Expenses (ALE) coverage works and how much coverage is in your plan. ALE covers temporary living expenses (to a point) if you are unable to live in your home after a disaster. If you own a rental or rent out part of your primary residence, this coverage can also reimburse you for any lost rent that was not collected during the reconstruction period.

Liability Insurance

Liability insurance will cover you against lawsuits for bodily injury or property damage that is caused by you, a member of your household or your pets. Be sure to have enough liability insurance to protect your assets. The minimum amount is usually $100,000, but you may seek more if you have higher-value assets you don’t want to risk losing. You may also want to consider an additional umbrella (or “excess”) liability policy that goes beyond your standard homeowners insurance and auto insurance limits.

Insurance Provider

Last but not least, you should do your due diligence when researching and selecting a homeowners insurance provider. Talk with multiple agents and review multiple policy proposals to find the option that works best for you, your family, your budget and your property. Don’t pay for more than you need, but don’t get cheap on the coverage items you definitely need.

For help with your insurance planning and wealth management strategy, contact Illumination Wealth today.