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It Is Time to Review Your Homeowners Insurance Coverage

By Xiaomin Guo, Ph.D., CFP®

TAMPA (December 4, 2020) -- Many of us hold homeowners insurance to protect ourselves from huge potential financial loss due to the damage to our sweet homes, especially if we still have mortgage balance outstanding. Homeowners insurance provides coverages over dwelling and other structures, personal properties inside the building, loss of use, as well as personal liability to others. The premium we pay for insurance depends on how much coverage we buy for our homes. For a $300,000 value home, you can definitely by $300,000 dwelling coverage, or $250,000, or just $200,000. Of course, the less coverage we buy, the more we can save on insurance. But is it a good practice to save on homeowners insurance in this way? Obviously, no. Otherwise, only one type of insurance product in the market provides the least coverage. One important provision we can never ignore in insurance is the coinsurance – if the homeowners insurance coverage is less than 80% of the home’s replacement cost (money needed to restore your home based on most recent cost or price level), the insurance company is only a coinsurer and compensates the partial loss.

Suppose a fire in your kitchen causes structural damage that would cost you $10,000 to repair. If you carry $200,000 of insurance coverage on your home with a $300,000 replacement value, which is definitely lower than 80% of the replacement cost ($240,000), you will never receive $10,000 from the insurance company for the damage even though the $10,000 loss is within the insurance limit. Instead, generally you will only get 83.33% (200,000/240,000=83.33%) of the $10,000 which is $8,333.33 from the insurance company. You need to coinsure the rest $1,666.67 as you are not holding enough coverage on your home.

So it is always recommended to hold at least 80%, ideally 100%, of the replacement cost of your home with regard to the homeowners insurance coverage. Due to inflation, your coverage may gradually fall below the 80% coinsurance benchmark as the replacement cost rises. According to the U.S. Bureau of Labor Statistics, in September, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2% on a seasonally adjusted basis, rising 1.4% over the last 12 months, not seasonally adjusted. In Tampa-St. Petersburg-Clearwater Metro Area, the CPI-U went up 1.4% over the past two months, and up 3.3% from a year ago, with the housing sector prices up 4.2% from a year ago. It is now the time for you to review your property’s value and your homeowners insurance coverage.