How Much Homeowners Insurance Do I Need? | Davis Insurance Associates – Myrtle Beach Home Insurance

Introduction:

If you own a home, you want to make sure it is insured correctly and with enough coverage. Myrtle Beach is beautiful, but the area comes with increased possibility of hurricane or flood damage. Hence why Home Insurance rates are higher here compared to many parts of the U.S. Let’s dive into how much coverage you should purchase and the reasons for it.

As you will see below, there is a lot to cover, and I do not intend to cover every aspect of getting the correct amount of coverage. So that I don’t go down too many rabbit holes, I am limiting the information to the below.

 

Key Coverages to Review for Proper Coverage:

• Coverage A (Dwelling) – This coverage limit is the maximum limit you can receive due to a covered loss for the main structure on the property. This is pretty much always going to be the house (vs. a shed or something else).

Why is it important to have enough coverage? The main reason is so you have enough coverage to rebuild or repair your home close to the way it was prior to covered loss. In addition, most home insurance policies have wording causing coverage to be reduced if there is not adequate coverage at the time of a loss (think of that as a penalty for being underinsured).

Side note: It is very common to see an endorsement added to a Home Insurance policy that adds up to 20% or 25% coverage to Coverage A. The endorsements and limits vary based on companies/policies, but I think they are great endorsements. BUT your home must be insured to value for the endorsement to afford the extra coverage. I point this out, because I’ve had numerous conversations with potential clients that did not understand that for one reason or another.

• Coverage B (Other Structures) – This coverage limit pertains to other unattached structures on the property, such as a detached shed, gazebo, in-ground pool, fence, or other permanent structures.

Your detached structures also need to be insured for enough to rebuild them in case of a total covered loss. And like your home, they need to be in good condition.

• Coverage C (Contents) – You want to carry enough coverage to be able to replace all of your personal property at what it would cost today.

Why is it important to have enough coverage? Most Homeowners Insurance policies cover your Personal Property at Replacement Cost (NOT ALL DO), so don’t value them lower since they may be older or don’t think of them as depreciated. Again, you may be penalized at the time of a covered loss if you are underinsured.

• Coverage D (Loss of Use) – This provides coverage for the additional living expenses incurred, as a result of your home being deemed uninhabitable due to damage sustained from a covered peril.

The default limit for this (with many, but not all insurance policies) is usually 20% of Coverage A. For an example, if your home was insured for 500,000 (Coverage A), the policy would also provide up to 100,000 limit for Loss of Use. Don’t underestimate this coverage. Additional costs that may come from renting temporary housing, eating out, additional travel, storage unit rental, pet boarding, or other things can add up rather quickly.

• Coverage E (Liability) – Personal Liability provides coverage if a claim is made, or suit is brought against an insured because of bodily injury or property damage arising from a covered occurrence.

Why is it important to have enough coverage? First off, this coverage is very inexpensive for the value it brings. Typically, 100,000 limit is included, but today it is more common to see 300,000 or 500,000. To increase your limit from 100K to 500K may only increase your premium by around $30 per year. We live in a litigious time, and I’ve seen friends sue friends and neighbors sue neighbors over pretty insignificant things.

 

*For this blog, those are the coverages I am focusing on. There are other coverage limits that are important, and several endorsements that are very important. The other coverages deserve their own blog and I hope to get around to writing it one day before long.

 

How to Calculate the Coverage Needed:

Now that we understand some basics of the above coverages, let’s try to figure what limit you should have.

• Coverage A – I’m not saying this is the most important, but from the claims I have seen in almost 20 years, this is where people most often wish they were more careful. So how much do you need?
  >  You should have at least equal to the home’s replacement value so it can be completely rebuilt back to the way it was before loos, at today’s cost. Plus, some coverage for debris removal and demolition costs.
  >  Not the amount you bought your house for, or what you could sell it for.
  >  Not the amount used to determine the property tax.
  >  Not the amount that shows on an appraisal (except some companies can use the rebuilding value if that part is completed).
  >  Not the amount that YOU can rebuild it for, or a friend can rebuild it for.

So how do we calculate that? The most common way – Virtually all home insurance companies have a rebuilding cost calculator that calculates a Replacement Cost Estimate (RCE). The insurance agent uses this tool, along with the details of the home and feedback from the homeowner, to produce an ESTIMATE. These tools have been used for years and hold up pretty well. The tool utilizes home features such as, year built, construction type, siding type, roof type, roof material, square footage, details of attached structures, and more; then it typically adds some coverage for debris removal and demolition. You kind of have to assume that a contractor will have to spend some money cleaning up debris and removing the left over parts of the home.

Insurance companies (and agents for that matter) do not want to underinsure your home, and most just won’t do it. If you get 3 – 5 quotes and the Coverage A on one is considerably lower than the others, I recommend not to take that one. At least discuss it with that agent to see if coverage should be increased and be cautious.

• Coverage B – You can look at determining the coverage needed about the same as above for Coverage A. You need enough coverage to rebuild ALL the structures at today’s cost with the same or similar materials.

• Coverage C – There is not pretty way to calculate this. The best way is to literally go through your home and add up the Replacement Cost of each and every item. While you are at it, you should inventory the items (you would be happy you did if you have a covered loss). If you are going to take a guess, I would add 10-20% more. Most people tend to underestimate this amount. Don’t forget about the stuff in your attic, your laundry, pots & pans, clothes, toiletries, and all.

Side note: Most Home Insurance policies include 30 – 75% of coverage (based on Coverage A) for this, with most closer to 50%. I would say most homeowners need the 50 – 75% range for Coverage C.

• Coverage D – As stated above many policies default the limit to 20% (of Coverage A). In many cases, this should be enough. But look at your specific circumstances. Would you maybe need an extra car if you are no longer close to work? Do you have several children and it may cause you to rent a larger more expensive house or apartment? Or what other things?

• Coverage E – I want to point again, that increasing this limit to 300K or 500K is not expensive. But consider how much you could lose if you are liable for someone’s injury. What risk factors apply that makes you more susceptible?
  >  Do you have a lot of savings or other assets to protect?
  >  Do you like skiing, hunting, or other activities where you could potentially injure others?
  >  Do you have a dog, swimming pool, guns, or a trampoline (trampolines are bad for home insurance)?
  >  Do you often host parties at your home?

Side note: Consider purchasing an Umbrella Insurance policy for additional liability protection.

Other Considerations:

1. Know the difference between Replacement Cost (RCV) and Actual Cash Value (ACV).

• RCV – Means the insurance policy will pay to replace/repair/rebuild without depreciation, or at today’s cost for a similar new item/material. This is the preferred settlement option. Note, the item must be replaced for RCV to apply. In another words, usually if you just take cash (but do not replace the item) it will be settled as ACV. Most policies give the insured a short time to recover the difference between ACV and RCV once the item has been replaced.
• ACV – Basically means depreciated, and you won’t be happy if you choose this coverage at the time of a claim.

2. Is your home old or not up to code?

• If you have an older home (or building codes in your area have changed) you should consider increasing Ordinance or Law Coverage. The standard amount is 10% (based on Coverage A), but limits up to 20%, 50%, or even higher are available. Just know that (without increased coverage for this) your policies may not cover the additional cost of bringing a house up to code after a full or partial covered loss.
• If your home is older, you may need to purchase a modified replacement cost policy or a policy with Functional Replacement Cost Coverage. This means that instead of repairing or replacing features typical of older homes, such as plaster walls, with the same or closely similar materials, the policy will pay for repairs using today’s standard building materials and construction techniques.
  

 

Conclusion:

Navigating the nuances of Homeowners Insurance, especially in Myrtle Beach can be complex. Partner with a local insurance agency that is familiar with the area’s risks. An experienced independent insurance agent can help tailor a policy to your specific needs.

Don’t forget to regularly review and update your insurance policies. Life moves by fast, and you may miss important insurance queues if you do not regularly meet or talk to your agent.

 

Disclaimer: This blog is my attempt to only give a brief overview of coverages and to help you determine how much coverage you may need. I do not directly reference the HO3 Policy Form, but this information leans toward that type of policy since it is the most widely used. READ YOUR POLICY for coverage details and have an open conversation with your insurance agent about your risks and coverage needs. Nothing said here overrides your policy documents.