Two of every three homes are underinsured by an average of 22 percent, according to Nationwide. With the median U.S. home price at $196,500, a total loss of a home would require the owner to pay about $43,000 out of their pocket.
That’s a lot of cash to come up with if your home is destroyed in a fire or other disaster.
Mortgage lenders require home insurance for at least the cost of the home. Without it, homebuyers won’t be able to get a home loan or mortgage rates for a loan. However, that insurance may not cover all of the major losses you may incur.
Insurance gaps in homeowners insurance can be plugged, however, by buying enough insurance to begin with and making sure you have the right type of coverage. Not buying them can simply be a mistake, or a choice a homeowner makes to save some money on an insurance premium.
Here are some overlooked insurance coverages that if omitted or minimized could come back to bite you:
Not enough dwelling coverage
Dwelling coverage protects the main structure. Homes can be underinsured in this area because a mortgage lender may only require insuring the market value of the home instead of the replacement value.
Market value is the amount of your loan. That could be less than the replacement value of the home — what it costs to rebuild your home with similar quality materials and construction methods. Improvements you’ve made to the home probably won’t be covered.
Without replacement value in your dwelling coverage, your home could be underinsured.
An insurance agent can use a replacement cost calculator to determine the dwelling coverage you need. For example, if you’ve built an addition onto the house or have added new windows, they could be added to the replacement cost. High-end improvements can also be added.
Too little liability coverage
Homeowners insurance provides a type of insurance you may not realize you have — personal liability insurance. If someone trips and falls on your sidewalk, or your dog bites the mailman, then your insurance will cover you — but only up to your liability limits.
Coverage amounts vary widely, from $100,000 to $500,000. If your home is expensive and you worry that you could be sued for millions, then you may need to buy an umbrella policy for excess coverage.
Own a lot of jewelry?
You may not have enough personal property insurance if you own high-value jewelry, watches, expensive artwork or other expensive things.
Personal property coverage covers your belongings from theft, fire and other losses, but only up to a certain amount or their replacement value as they diminishes over time. A rug that has been used for years, for example, is worth a lot less than one that’s new or only a year old.
Some items such as expensive jewelry should be appraised and covered under a separate floater policy.
Enough insurance for a natural disaster
A separate policy will be needed for some natural disasters, such as a flood or earthquake. Without this specific, extra insurance or a rider policy, your home won’t be covered if such a disaster hits.
Flood insurance doesn’t fall under a standard homeowners policy. Water damage can be caused by more than excessive rain. Basements can be flooded from ground water and seepage because it wasn’t maintained properly.
The language in an insurance policy can be misleading. An “all perils” policy can have standard exclusions for damages caused by “earth movements” such as landslides, says Joel Ohman, a Certified Financial Planner and founder of InsuranceProviders.com.
While floods and earthquakes aren’t covered in standard homeowners insurance policies, tornadoes, hurricanes and wildfires are, though some policies may not cover some damage from hurricanes, Ohman says.
Not enough water damage coverage
Beyond flood insurance, homeowners insurance can also cover water damage from other causes.
Water damage and freezing accounted for more than 45 percent of property claims by homeowners in 2015, according to the Insurance Information Institute. But insurance companies don’t view all water claims equally.
Water damage that may not be included can come from: a sewer backup, sump pump failure, flash flood, and water entering through a window well during a storm. Coverage for some of these could be added through an endorsement or rider.
If a washing machine hose breaks and water damages a wood floor, that would be covered under a standard homeowners policy.
An agent helped Todd Huettner of Huettner Capital come within $1,000 of his policy limit for sewage backup coverage.
When buying insurance for a house he had just bought, Huettner didn’t know that the policy had sewer backup coverage. The base policy with his carrier was only $10,000, so his agent upped it to $25,000.
A sewage leak cost $24,000 to repair, leaving Huettner with enough insurance coverage by $1,000.
“I never remember him doing any of this since we had the same agent for years,” Huettner says, “and never having had a basement I didn’t think of it.”
Check coverage every few years
To make sure you’re home isn’t underinsured, review your policy with your insurance agent every few years.
Make sure your liability coverage is enough to cover your personal assets. If you’ve bought an expensive TV, computer or upgraded the kitchen, make sure they’re covered. If you’ve recently added a dog to the family, or put a trampoline in the back yard, ask about extra liability coverage.
It’s a lot easier than pulling money out of your pocket when an accident happens or disaster strikes.