The number one thing you need to know when purchasing homeowners insurance is the amount of coverage. Having enough coverage eliminates future surprises if you submit a claim. Insurance companies follow the 80 percent rule which states that for your insurer to fully cover the cost of damage to your home, you must carry insurance that covers at least 80 percent of the replacement value of your house.
If your insurance policy is less than 80 percent of your home’s replacement value, you might be on the hook to cover part of the damage. The coinsurance 80 percent clause states your insurance payout will be reduced to reflect the proportion of coverage you have versus what you should have. Inflation and home improvements inevitably increase the value of your home, so it’s imperative that you maintain adequate coverage and report renovations to your insurance company as soon as possible. If you’re unsure if you will be able to afford the possible premium increase, consult with your insurance agent prior to beginning house renovations and improvements.
The 80 percent rule requires homeowners to hold a policy that covers 80 percent of the replacement value and not the market value. Market value is the price your house would sell for on the real estate market. Factors like location, land value, and housing demand affect a home’s market value. However, replacement doesn’t factor in the land or market conditions. Replacement value is the cost to rebuild or repair your home with similar materials. Insurance companies want to restore the damage to your home which is why they base the 80 percent rule on replacement value. Market value will fluctuate creating inaccurate numbers for insurance purposes.
Regularly review your policy to ensure you are appropriately covered to deal with rising costs due to inflation and improvements you made to your home. In the event of a claim, you don’t want to be left with an uninsured or partially insured situation that has the potential of bankrupting you or depreciating the value of your home.
