Millions of people across the United States don’t have enough homeowners insurance coverage. If you’re one of them, and your house gets destroyed, you may not receive enough money to rebuild it, which can lead to a financial catastrophe.
What Does It Mean to Be Underinsured?
If your house is underinsured, that means you have homeowners insurance, but your coverage limits aren’t high enough to rebuild your house if it gets destroyed by a storm, a fire or another covered peril. If you file a claim for a total loss and the amount your insurance company pays you isn’t enough to rebuild your house the way it was before, you’ll have to pay the difference (which may be tens or hundreds of thousands of dollars) yourself or settle for a house that isn’t like the one you lost.
Why Are So Many Homeowners Underinsured?
Some people mistakenly believe that the amount of insurance coverage they have should be equivalent to the amount they paid for their house, the amount they owe on their mortgage or their home’s current market value. None of those is correct. The coverage limit should be enough to rebuild the house if it’s completely destroyed.
Many homeowners don’t have adequate coverage because they underestimate how much it would cost to rebuild their house. Sometimes homeowners fail to research local costs for construction materials and labor, or they keep the same coverage limits from year to year despite rising costs. Policyholders may also make home improvements that increase their home’s value, but not increase their insurance coverage limits.
Some homeowners don’t think they’re at risk for a total loss and purchase a policy with relatively low coverage limits to save money on premiums. The reality is that natural disasters, such as wildfires, tornadoes and hurricanes, strike across the country, and no area is immune to danger.
Homeowners insurance policies may have sub-limits and deductibles that apply to specific types of losses. If a loss falls into a category with a lower level of coverage or a higher deductible than the rest of the insurance policy, the homeowner will have to pay more out of pocket.
Many homeowners are underinsured because they don’t understand the difference between replacement cost and actual cash value coverage. A policy with replacement cost coverage will pay the amount it costs to rebuild a house that’s destroyed, up to the coverage limit. With an actual cash value policy, the insurer will take depreciation into consideration and the payout may be significantly less than what it will cost to rebuild the house.
Do You Have the Right Insurance Coverage?
Review your homeowners insurance policy and look at your limits and sub-limits. Then get in touch with your company or agent to figure out if you’re underinsured. Raising your coverage limits will cost you more in premiums, but it can help you avoid a financial nightmare in the future.