Homeowners frequently ask if they can reduce their homeowners coverage because the market value of their home has fallen. Unfortunately, you can’t. Insurance value is based on the cost to rebuild your home, and construction and labor costs have not declined during the housing downturn. But your home’s insurance value may still be less than its market value: Market value includes the property as well as the dwelling. So you need to figure your home’s insurance value separately and recheck the number every few years.
Don’t forget to update your insurance value when you do any major home improvements. Insurers used to pay whatever it took to rebuild your home, but many now limit coverage to 120% to 130% of your insured value. It could cost less than $50 a year to boost your coverage by tens of thousands of dollars and ensure you have the coverage you need.
Flooding Not Included
Your homeowners policy does not cover flooding. But you can buy flood insurance through the National Flood Insurance Program. If you think you need coverage, do it now: There is a 30-day waiting period before flood insurance takes effect. The annual cost is based on how prone your area is to flooding — the maximum $250,000 of coverage costs $348 in a preferred-risk area; the same coverage can cost more than $2,600 in a high-risk area.
Water damage can also be caused by sewer backup, and most homeowners policies do not cover sewage damage. It can cost as little as $50 per year to add $10,000 to $20,000 in coverage that pays out if a sewer line backs up or your sump pump stops working.
Also, most policies pay only to replace your home as it is built now — not to comply with new building codes. If you live in an old home or if local building codes have become more strict in the past few years, it may be worthwhile to add a building-ordinance rider to your policy to cover those extra expenses.
Homeowners policies generally limit coverage for jewelry and collectibles to just a few thousand dollars — paying up to $1,500 for all of your jewelry, for example. But you can add coverage for your valuables up to their appraised value. The cost is based on the amount of insurance you buy — generally about $10 for $1,000 of coverage for jewelry, and $1.50 for $1,000 of coverage for the appraised value of other items.
Remember, once a storm has formed, most insurance companies will no longer write policies or add-on protection for that particular storm. So if you wait too late, you may not be able to do anything about a lack of coverage or obtain flood insurance. Do it now while you still can.