Home insurance coverage is crucial for helping you survive financially if the worst happens to your home. However, there are times when people find out they don’t have as much coverage as they thought. The 80 percent rule in home insurance is fairly standard in most policies, and understanding how it works can help you ensure you’re never caught underinsured when you need to be protected from a financial loss.
How the 80/20 Rule Works
The majority of insurance companies require homeowners to insure their properties for at least 80 percent of their replacement cost. Ideally, you should strive to insure your home for as close to 100 percent as possible, but the 80 percent mark is where most companies draw the line. If you fail to have your home covered for at least that amount, the company might not be willing to pay out a full claim.
How Replacement Cost Differs from Market Value
One of the problems homeowners sometimes run into is not fully understanding the difference between the replacement cost and the market value of their homes. The replacement cost of your house is based on the main materials that make up the structure. An easy way to look at this is to think about what it would cost to rebuild your house from scratch if it was completely demolished by a fire. You would need funds for the actual building along with the parts that enhance the functioning of your house, such as the plumbing fixtures and appliances.
The market value of your house includes things such as the land that surrounds your property. It might be higher than the replacement cost of your house due to factors such as the desirability of your home’s location. The market value simply represents how much a house can be sold for in its current condition, and it could easily be higher or lower than the replacement cost, which often leads to confusion.
What Happens When You’re Underinsured
Finding out you’re underinsured is upsetting, especially when you’ve been paying your premiums on time. However, you should still be paid for at least the prorated amount of the replacement cost you have coverage for. Keep in mind you may be required to pay a deductible before the insurance company’s responsibility kicks in.
When to Upgrade Your Insurance
Keeping your coverage above 80 percent of the replacement cost is essential for avoiding an unwelcome surprise during a catastrophic situation, which means you may need to occasionally increase your level of coverage. Some companies allow for the addition of inflation guard coverage that protects you if the costs of the materials used for your house rise over time. You may also need to upgrade your policy after you finish a remodeling project that raises the replacement cost of your home.
No matter which type and amount of coverage you choose, make sure to buy your home insurance from a trustworthy, experienced provider. For reliable, affordable home insurance, San Diego homeowners know they can trust Altra Insurance Services. We also provide renters, commercial, motorcycle, and auto insurance. San Diego residents can receive a free quote by calling one of our friendly agents today at 619-474-6666.