There are many clearly spelled out rules and guidelines that apply to home insurance and insurance in general, so it’s understandable to be a bit confused by some of the “unwritten rules” that tend to apply to home insurance. One of these is the 80 percent rule. Here’s what you need to know about it and how it may affect you.
The Basics of the 80 Percent Rule
In a nutshell, the 80 percent rule is often used as a guideline for what an insurance provider will cover after a disaster. In this case, it means insurance companies won’t provide full coverage should a disaster occur unless the policy is equal to, at the very least, 80 percent of the total replacement value of the insured home.
What It Could Mean for You
This unwritten home insurance rule can affect how much of the cost of rebuilding your home you’ll have to absorb yourself. For instance, if your home is insured for less than 80 percent of its total replacement value, your insurance provider may only cover the difference. A common way to determine if your home is insured for 80 percent of its replacement value is to divide the amount of your purchased coverage by 80 percent of the determined replacement value.
Market Value vs. Replacement Value
The market value of your home isn’t the same as its replacement value. It’s important to know the difference so you can determine whether or not you may need to make adjustments to your policy. Market value refers to the value of your home based on its current assessed value. Curb appeal, architectural style, and construction quality are among the factors that typically determine the market value of a home.
What replacement value refers to is the average costs that would be involved if your home would need to be rebuilt. This figure is often determined by:
• Your home’s square footage
• The value of interior and exterior features
• Labor costs related to the rebuilding process
Home Improvements Could Also Influence Replacement Value
Just because you initially purchased enough home insurance to cover 80 percent of your home’s replacement value doesn’t mean you’ll always be good to go coverage-wise. What you’ve done to your home since you initially insured it will also have an impact on its replacement value.
For example, if you’ve made significant updates to your kitchen and bathroom or added on to your home over the years, costs for replacement could be much higher now. This could, in turn, mean you no longer have enough insurance to cover 80 percent of the replacement value—which could come as a surprise should the unexpected occur. For this reason, it can be helpful to regularly review your home insurance policy so you can make any coverage adjustments if you wish to do so.
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 (800) 719-9972.