Our advisors here at NewFocus Financial Group are finding that more and more people’s homes are underinsured. We recently reviewed the coverage of a Sunnyvale resident and showed the family how they were underinsured for the replacement value of their home by nearly 40%, or $400,000!
The cost of building along the West Coast has increased drastically over the last five years. That makes now an opportune time to take a fresh look at the dwelling coverage in your homeowners policy. Try this site to help get a handle on building costs in your area: www.building-cost.net.
The first step in reviewing your homeowners coverage is to go over the dwelling coverage, which covers damages to the home and attached structures such as the garage. There’s a great article on NerdWallet regarding this issue: https://www.nerdwallet.com/blog/insurance/understanding-homeowners-insurance/.
When it comes to dwelling coverage, you want to focus on the cost of rebuilding your home. Don’t confuse this cost with the purchase price or the real estate market value. Living in the Bay Area is too expensive for most people working in construction, so with the shortage of workers and the high demand, the cost of building has gone way up.
The Northwest is also seeing a considerable spike in constructions costs. A project that I got involved with in Camas, Washington—a project that started eight months after the original construction bid—saw the cost of framing increase by 25% in that eight-month period. The shortage of people with quality construction skills, coupled with high demand for those people, means we can expect construction inflation to continue as long as mortgage rates remain low.
If you insure your home for just the real estate market value, you might not have enough funds for repairs. You could end up dipping into savings to rebuild your home if something terrible happens such as the recent fires in California wine country.
To estimate your rebuilding cost, multiply the square footage of your home by the building costs from the link provided above. So, really, step number one is to find out your actual square footage.
Once you have an idea of the replacement cost, get hold of your insurance agent.
Keep in mind that many insurance companies offer their own replacement analyst tools, so the easiest thing to do is to call your insurance agent and ask them, “Am I properly insured for rebuilding costs?” Remember: It is not the value of your home on Zillow but the rebuilding cost that you need to use.
Other types of protection you should discuss include protection on other structures on your property.
Ask about “additional living expenses” coverage. This coverage provides cash if you have a covered loss, and it can be a real help while you get back on your feet. We have clients in Santa Rosa who lost their home, and they have spent several weeks in a hotel dealing with a plan to rebuild. Their coverage has meant one less stressor for them.
Enhanced dwelling protection is another form of coverage. Most insurers offer extra coverage for your house’s structure in case your original coverage limits are not enough or if there is a spike in construction costs.
You should also review personal property coverage, which will pay to repair or replace belongings that are stolen or damaged.
Liability coverage pays if you are found responsible for another person’s injury that may have occurred on your property. Also consider “medical payments” coverage, which covers injury treatment costs for guests who get hurt on your property, or individuals or family members accidentally injured while away from home.
While you are speaking with your agent, make sure you have umbrella coverage for two times your net worth. Obtaining this coverage is a simple process until you get up to about $4 million—the level where most insurance companies max out and tell you to call Chubb, Lloyds of London, or some other outside insurer.
Some optional coverages you can consider include water backup coverage, which covers damage caused by a burst pipe or other issues related to plumbing. Now, some insurers cover this automatically; others don’t. Either way, the cost of repairs makes the coverage one you might consider.
The identity theft coverage offered by most homeowners insurance policies is not worth the cost, yet the protection is better than nothing. I like protection that will handle the process of repairing your ID, such as the services offered by Identity Guard, LegalShield, or Zander. We published a blog on the issue that you can read, but it’s worth asking your agent to explain their coverage.
Personal property endorsements or “floaters” that cover high-end items exceeding your regular personal property limits are necessary when you have collectibles such as jewelry and fine art. For your personal property, you generally want coverage amounts that are 50% or more of your dwelling coverage amount—at least for most states. Such coverage might be costly for California or other areas where real estate is very expensive. So look at replacement cost versus actual cash value when it comes to your personal items.
Actual cash value will keep your premiums down. It is cheaper since it replaces only the “post-depreciation” cost. If you buy something, especially if it is an electronic item, it will depreciate over time, and the insurance company will offer you only the cash value of what that item was versus the much higher replacement cost.
Trying to keep costs down with a higher deductible? You can go for a higher deductible if you have your family’s emergency reserves in place.
A final and crucial step is to document what you own. Use the vault in your NewFocus Financial Group wealth management site to store pictures and videos of your home and valuable items so you have proof of coverage accessible anywhere you may be. If you need help in posting these items to your vault, feel free to call your NewFocus advisor.