Loan Amount vs. Insured Amount: Determining How Much Coverage You Need
If you own a home and have a mortgage, your lender will require you to have homeowners insurance. Many homeowners immediately go to buy coverage on their loan amount, but this is WRONG.
Loan Amount vs. Insured Amount
Your loan amount is the amount of coverage that your bank wants you to have built into your homeowners insurance policy. This amount is not necessarily the appropriate insured amount. Often you need to buy insurance coverage for a higher insured amount than the loan amount, due to replacement cost.
The replacement cost of your home is the cost to rebuild your home from the ground up. In rare cases, the insured amount on your home insurance can be lower than the loan amount -- e.g., if you buy a beachfront property and the value of the land is high. If the land under your property is valuable, it doesn't mean you need a higher insurance limit to cover the ground under your house.
Here are some little-known facts about your ideal insured amount:
- 50% of homeowners are underinsured in case of natural disaster
- Your insured amount should include replacement cost of your home, outbuildings, other structures, and personal belongings.
- The national average cost to rebuild after a natural disaster is $150 per square foot, according to the National Association of Home Builders.
Additional Coverage You Might Need
Your insured amount should cover the replacement of your home and belongings, but you may need to get additional coverage for your homeowners insurance. The Insurance Information Institute recommends that your insured amount be equal to the rebuild cost of your home, the replacement cost of your possessions, and additional living expense to cover your hotel costs if you are displaced.
Don't be left unprepared in case of disaster. To calculate your appropriate insured amount, take these additional steps:
- Make a complete home inventory list of expensive or hard to replace belongings, complete with replacement cost.
- Check with local builders to determine an appropriate per square foot rebuilding cost in your area.
- Check with your insurance agent to determine if you can purchase additional coverage beyond your loan amount.
Don't get caught underinsured when disaster strikes. Hopefully, this information helps you make a more informed decision about how much home insurance coverage you need for your house.
At your service,