(1) When it comes to learning how to estimate home insurance, the best way to get started is by considering what it would cost to rebuild your home at the current prices for materials and labor.
(2) You also need to calculate the value of all personal belongings that could be destroyed if your house was to sustain a significant amount of property damage.
(3) Lastly but not least, you’ll need to estimate the value of all your personal assets you risk losing if someone was to file a lawsuit against you and win.
***These figures are going to help you determine the coverage amount you’ll need to purchase under your new home insurance policy.
- Much Does Home Insurance Cost?
- How to Perform Your Own Home Insurance Estimate
- What is the Replacement Cost of Your Home?
- What is the Replacement Cost of Your Property?
- What is the Total Value of Your At-Risk Assets?
How Much Does Home Insurance Cost?
The average cost of homeowners insurance has jumped by over 50 percent in the last decade alone, putting the nationwide average here in the United States at $1,083 in 2018. It’s super important to note this, rates can significantly differ based on the state you live in, the specific home you need coverage for, your personal credit, etc.
One of the most affordable geographical locations for home insurance is in Oregon. On average, residents in the state only paid an average of just $574 per year for their policies. Now, you can compare that to beautiful Florida, where Florida residents averaged $2,055!
For those of you that are local and looking for Colorado home insurance, the state ranks in the top half of cost.
How To Perform Your Own Home Insurance Estimate
Trying to estimate your own home insurance can be tough and challenging. While we always recommend giving us a call (1-303-623-1997) there is a few things you can do to get a ballpark estimate without calling your insurance carrier or price shopping.
First, you need to calculate what it might cost to insure your home by addressing a number of questions about your house, personal property and regional risks. Here’s a few questions to help you get started.
- How much would it cost to rebuild your house today?
- What regional risks, such as high humidity, or a propensity to flooding or fire, pose a risk to your home?
- What is the total value of your personal property, excluding vehicles?
- What is the total value of your at-risk assets, if someone were to sue you?
The answers to the questions above are going to help you determine the insurance limits you’ll require for the underlying coverages that will make up your home insurance policy. These coverages include:
- Dwelling Insurance: Coverage for your house and its components, such as its roof, plumbing and built-in appliances.
- Personal Property Insurance: Coverage for your personal belongings, such as clothing or TVs.
- Liability Insurance: Coverage if someone is injured on your property, and files a lawsuit against you.
What’s The Replacement Cost of Your Home?
Do you know how much it is? The replacement cost for your home would be the dollar amount that it would cost to be built brand new if it were completely destroyed and you carried the proper dwelling coverage to match that specific amount.
Now, your home’s replacement cost is different from your home’s resale value. Don’t forget about this! In general, your home’s replacement cost will be less than the sale value, since the land your property sits on (and its location) dictate much of the value of your property.
As you’re likely seeing now, calculating the replacement cost of your home is complex to say the least, in most scenarios, home insurance companies use a combination of public data and personal information you give them to calculate this for you.
Also, most insurers will perform inspections on newly insured properties, the reason being to confirm that the coverage level your purchased corresponds to the coverage you need, as well as ensuring the price your paying is adequate for the insurance you have.
Again, you’re better off working with an insurance provider versus trying to do your estimate on your own.
Building Your Own Home Replacement Cost Estimate
If you do want to do your own estimate, a good place to start is by learning the average cost to build a home per square foot in your area. Once you have that, you’ll then need to multiply that metric by the square footage of your house. While the average cost to build a home in the United States is around $150 per square foot, this number can greatly differ depending on where you live.
You’ll also need to calculate the cost of the major components of your home. Again, cost for these components can differ greatly depending on the home. Some of these components would include;
- Exterior features like siding and stonework
- Flooring, especially if you have high-end hardwood floors
- Cabinets and interior fixtures
Understanding Home Insurance Coverage Limits
When you’re choosing the specific home coverage to buy, you’re going to need to choose among 3 policy limits that will dictate how much of your house’s value your insurance company is required to cover if your home is is ever damaged or destroyed.
- Actual Cash Value (ACV): The total cost to rebuild your house is known as ACV. Let’s use a quick example. 9 years ago, you buy a water heater for your home. You paid $600 for the unit 9 years ago. The area floods and the water heater was damaged in the event. When you file your claim, the insurance company will not buy you a new water heater. Rather, they’re going to pay for a 9 year water heater. If the water heater had depreciated in value by 25 percent, you’re going to receive a check for $450. Since it’s likely not a wise idea to buy a 9 year old water heater, most people would put the $450 on a new one and pay the rest of the balance out of pocket. ACV is often the least expensive limit option.
- Replacement Cost Value (RCV): The RCV refers to the amount it would cost to rebuild your home at today’s prices. While this type of limit is more expensive than a policy that insures only your home’s actual cash value, RCV coverage may give you a substantial larger amount of additional reimbursement if your home is ever damaged or destroyed. Another big benefit is that it protects you against depreciation gaps, like our example above. Unfortunately, RCV coverage can also fall short of fully reimbursing your replacement costs.
- Guaranteed Replacement Cost (GRC) & Extended Replacement Cost (ERC): The GRC/ERC guarantees that your insurance company will, as needed, pay a certain percentage above your home’s replacement cost if a regional disaster, such as a fire, temporarily drives up the cost of labor and materials in your area. This is the most expensive limit you can buy.
Here’s a quick example, let’s say that the cost to rebuild your home today is $250,000. We recommend buying the same amount of dwelling insurance. If you can swing it, it wouldn’t hurt to also carry RCV coverage for your policy’s limit.
What’s The Replacement Cost Of Your Property?
In most scenarios, homeowners insurance companies set the limits for your personal property insurance, typically around 50-75 percent of your dwelling coverage. For example, your dwelling coverage limit is $250,000, your personal property coverage limit would likely be between $125,000 and $175,000, of course ultimately depending on the company and policy you end up choosing.
Now, this amount may be sufficient for you, it also may not be, that’s going to depend on the value of your personal belongings. To estimate how much personal property insurance you’ll need, you need to conduct an inventory audit of your personal possessions you want covered.
Here’s a list of things to include;
- Electronics, such as TVs and speakers
- Power tools
- Kitchen Appliances
You need to make this list, be sure to include each item and its replacement value. We always recommend going through your home and taking pictures, Be sure to capture your most important and valuable possessions. This documentation will help you to remember items you’ve lost if they’re stolen or destroyed, and will also serve as proof of possession in the event of a claim.
It’s important to note that there will be items that are not covered by your homeowners insurance policy. One example of this is your vehicle. Vehicles are a notable exclusion, they’re covered by your auto insurance policy, even if they are parked in your garage or elsewhere on your property. If your car was damaged in a home fire, it would be paid for by the vehicle’s comprehensive auto insurance coverage (as long as you have it). On the other hand, if a boat is housed beside your home and ends up damaged or destroyed, you’d need another insurance policy to cover it. It would require that you have a boat insurance policy to cover the additional value.
What about high valued items, such as furs, artwork and jewelry? All of these would be subject to additional limits. For instance, your home insurance policy may specify that jewelry will only be covered up to a total of $2,000, and only up to $1,000 per individual piece. If these limits are insufficient for your possessions, you can buy additional coverage in the form of a property schedule or endorsement.
Once you have a complete accounting, you’ll know about how much personal property insurance you need. Be sure to turn in your inventory accounting to your insurance company so they can document your belongings. This will be a huge benefit for your insurance claims you’ll make in the future. Be sure you keep it up-to-date once a year.
What’s The Total Value of At-Risk Assets?
The total personal liability insurance you need depends on the total value of your at-risk assets. These are personal assets you own that are not specifically exempted from liability lawsuits by your federal or state government.
Most of your belongings are at risk if you’re sued and don’t have adequate liability insurance to cover them. Even so, some assets, like your retirement funds, these may be exempt from lawsuits. Each state has different rules regarding how protected retirement funds are from legal actions, so you should review local laws to determine what is at risk. For example, 401(k) funds are better protected than IRAs in California. So Californians might need to include at least some of their IRA investments in their estimate of their total at-risk assets.
Most home insurance companies offer a minimum of $100,000 of liability coverage, and allow that amount to be increased to between $300,000 and $1 million. The difference in premium when you opt for higher liability coverage can be small, so we recommend choosing higher limits on your policy if you can afford it. For example, here are some sample costs of different liability insurance limits at State Farm:
If your total assets exceed the limit of your home insurance policy’s liability clause, consider purchasing an umbrella policy to provide extra liability protection. For example, if someone files a lawsuit against you for $750K million and your home insurance policy has a $500K limit, you’d be liable for the additional $250K. Now, if you have an umbrella policy in place that provides you with supplemental coverage of up to $750K, your umbrella policy would cover the additional $250K after your liability coverage is exhausted.
Are Regional Risks Excluded From My Policy?
Lastly, you want to check if there’s any regional factors that pose a risk to your home. Most home insurance policies have an open peril list of covered events that protect you against common disasters. Even so, hazards like regional flooding are usually excluded and often require a separate policy to get coverage.