September 14, 2006
How Much Is Enough?
I’ve been harping on the need for home insurance for so long that I forgot a basic question: How much is enough? This is quite an important question today because most people can hardly afford to waste any money – a dollar saved is a dollar earned. In the case of home insurance, you must ensure that you take enough to protect your home and your personal possessions in the event of a loss. Some insurers will offer you a policy that has a limit equal to at least 80 percent of your home’s value. So in the event of damage to your home, you will have to pay damages equal to the deductible. In case you wish to insure at less than 80 percent, you can do so, only remember you will have to pay a co-insurance penalty. This means you will be responsible for more of the cost of the damages.
One thing you MUST remember is that whatever percentage you choose, it should not reflect the cost of the property on which you’ve built your home. There are some banks and lenders which will try to make you buy insurance for the entire amount of the mortgage – including the cost of land. If your bank tries to make you do this, feel free to call the Department of Financial Services Consumer Helpline on 1-800-342-2762 (toll-free).
I’ll explain it through an example: If you buy a piece of property for $100,000 and build a house worth $150,000, your total mortgage would come to 250,000. When you take homeowners insurance you will need it only for the $150,000 home. In the event of covered peril destroying your home, your insurance company would pay $150,000 for the home and not for the property. So you must buy enough insurance to protect you’re your home or in other words for enough money to replace your house.
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