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Home Insurance

How Much Insurance Do You Need?

Evaluating Your Home and Personal Property

The first step in determining how much insurance you will need is to make an analysis of the value of your home (excluding the value of your land) and your personal property within it. In determining the value of your home, you must calculate how much it will cost to replace it if your home were totally destroyed. You can enlist the help of your insurance agent in determining this figure. In fact, most insurance companies make a physical inspection of your home when they first insure it. Using formulas that take into account whether your home is of brick or wood frame construction, total area, number of floors, number of rooms, etc., the company will be able to give you an accurate replacement cost value. In addition, although it would be expensive, you could also get an estimate from a contractor.

Determining the value of your personal property will require an extensive analysis on your part. You should go through each room of your house and list every piece of furniture and fixture within it. Some insurance companies provide Household Inventory Schedules which can be quite helpful with this task. Items such as sofas, tables, beds, TVs, refrigerators, and lawn mowers would be included in such a schedule.

As you compile your inventory you should supplement it with receipts indicating the purchase price and date of purchase and photographs of major items. Your inventory should be updated on an annual basis, or at the very least, whenever you purchase a large appliance or piece of furniture.

Some people periodically make a video of all their possessions. If you do, make sure all the drawers and/or doors of your furniture are open so you have a record of what is stored. It would also be helpful if you are able to verbally describe major items on the video. When complete, you should make a back up and store your inventory list or video in a safe place away from your home, such as your safe deposit box. You might also want to store this information in the home of a friend or relative or in your workplace.


Once you have determined the approximate worth of your home and its contents, in most cases, your homeowners insurance coverage will be on the homeís replacement cost. Generally, if you purchase coverage on a replacement cost basis and insure your home for at least 80% of its replacement cost, your insurance will automatically be issued on a replacement cost basis. Then, when you suffer a loss, your insurer would pay you the amount it would cost to replace or repair your home without deducting anything for depreciation. Of course, this type of coverage is more expensive than actual cash value coverage.

If you do not insure you home for at least 80% of its replacement cost, you will not receive full payment of your loss as the following example illustrates:

Ms. Jones and Mr. Smith both own 15-year-old frame houses. The estimated replacement cost of each house is \0,000.

Ms. Jones is insured for \,000 (80%) while Mr. Smith is insured for only \,000 (50%).

Both homes suffer windstorm damage, which completely destroys both roofs. The cost to repair each roof is \,000.

Since she was insured for at least 80% of her homeís replacement cost, Ms. Jones will be fully reimbursed for her loss, less any deductible.

However, because Mr. Smith did not have at least 80% coverage, his insurer will pay the greater of the actual cash value of the roof or the proportion of the cost to repair the roof which the total amount of insurance bears to 80% of the replacement cost of the building. The second method of payment reflects a co-insurance penalty since Mr. Smith did not maintain adequate insurance.

Assuming that the 15-year-old roof has an expected useful life of 25 years, its actual cash value is only \,000, computed as follows:

1 ñ (15(age of roof)) X \,000 = \,000

(25 (expected life))

However the proportional cost of repairing the roof would be computed as follows:

\,000 (insured amount) X \,000 = \,125

\,000 (80% of replacement cost)

After calculating these two formulas, Mr. Smithís insurer would pay him \,125, the greater amount of \,000 vs. \,125.

The replacement cost of your home must be estimated at the time you take out a homeowners policy. In most cases, insurance companies will inspect your home and use formulas that take into account a houseís construction, size, quality, location, nationally recognized construction indices and other factors to approximate its current replacement cost. As a result of the increase in the value of homes, insurance companies have become more active in evaluating the replacement cost of homes that they insure and often require periodic updates of that cost.


Coverage for contents is usually issued on an actual cash basis in homeowners and tenants policies. Your insurance company will determine any amount payable to you as a result of a covered loss by taking the current replacement cost of the contents and subtracting an amount for wear and tear and/or depreciation. It should be pointed out that there is no set formula for calculating depreciation. Not only may different insurers use different formulas, but various formulas may be used depending on the item that has been damaged. This means that you probably will not receive the full amount needed to replace or repair the property that has been damaged or stolen. However, some insurance companies may sell you an endorsement that provides replacement cost coverage for the contents of your home. Replacement cost coverage generally costs an additional 10% - 15%.