Homeowners Insurance: How much coverage do you need?

It’s probably the most important question in setting up your home insurance, but the answer can be complex. What you would want to do if your house burned down? Rebuild? Buy another house? Build somewhere else? Move to an apartment?

There are several valuation options available depending on how you would want to restore your home:

Guaranteed replacement – This pays to rebuild your home as it stands, even if the cost is higher than the limit of your policy (some companies have a maximum cap). This choice may be most appropriate if you would rebuild a home similar to or larger than your current one.

Full replacement – This pays to rebuild your home as it stands, subject to the limit of the policy. The limit must be at least 80% of the replacement cost to avoid penalties. This choice may be appropriate if you would be willing to rebuild a simpler or smaller home.

Functional replacement – This pays to rebuild your home with modern materials and techniques, subject to the policy limit. This is appropriate for older homes if you don’t mind replacing the woodwork, moldings, and other unique features with more modern alternatives.

Market value – This covers your home up to its market value. This might be appropriate if you would just buy another home. We don’t usually recommend this because the form is more limited and depreciation applies to some claims. It can be appropriate for those with a very limited budget.

Actual Cash Value – Depreciation applies to all claims. This valuation option is typically a last resort for homes in need of repair or otherwise not acceptable for replacement coverage.

Be sure to know what you want when you look for homeowners insurance, or work with a trusted insurance agent who can help you.

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