Ensuring Sufficient Insurance Coverage

By Steve Matthews

Monday, August 3rd, 2015

Does it make sense for a homeowner to insure a home for more than they paid for it? Sometimes, yes.

Mortgage lenders require all borrowers to get homeowners insurance before the deal closes. The mandated coverage is usually the lesser of two things: the loan amount or the insurer’s appraisal of the home value.

What you need to do is insure for the replacement value of home, not the value of the mortgage.

Standard homeowners-insurance policies lock their replacement coverage at a set dollar amount based on industry estimates to rebuild, repair or replace the insured item. Some specialized policies, however, may allow for costs that run above the estimated expense to reconstruct the exact same house inside and out.

While insurance prices can vary widely, the annual premium price difference between a standard policy and a specialized policy may only be in the hundreds of dollars.

Even if homeowners decide their home can be served with a standard policy, they could consider buying a rider with extra coverage for expensive items, such as jewelry or collectibles.

Finally, homeowners should ensure they have sufficient liability coverage in their policies to protect themselves against injury claims.

More considerations:

  • Don’t wait. Because premiums, like any expense, affect the debt-to-income ratio needed to qualify for a loan, home buyers should select an insurer as soon as possible after applying for a loan, ideally a month before closing.
  • Moving out. Make sure that insurance policies provide enough coverage for rent and living expenses if the homeowner needs to vacate during home repairs or construction, especially if the contractor or materials are delayed after a disaster.
  • Beef up security. If homeowners install security systems or other safety features, such as a sprinkler system or storm shutters, they may qualify for premium discounts.

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