Should I choose the minimum or maximum homeowners insurance coverage?

As homeowner insurance rates rise across the country, some homeowners are opting for policies that offer minimal coverage to keep their premiums affordable. Unfortunately, this choice will leave them at higher risk and in a position where they may have to pay more out of pocket if they have to make a claim on their policy. 

Why homeowners are choosing minimal coverage?

According to Bankrate’s Annual Emergency Savings Report, over half of Americans (56 percent) couldn’t pay for a sudden $1,000 bill from their emergency savings. A shocking 35 percent would need to borrow money, which includes 21 percent who would have to finance the unexpected expense with a credit card. 

In most cases, homeowners deductibles range from $500 to $2,500 making the cost of the deductible difficult to cover for many homeowners. Choosing minimal coverage and a high deductible may lead to lower premium but could leave the homeowner owing a deductible they can’t afford and if damage to their home exceeds their coverage levels they will have to pay any additional repair costs out of pocket. 

What exactly is underinsured?

Not carrying enough coverage and dropping certain coverage types are a couple of ways a homeowner can be underinsured. In addition, homeowners who no longer have a mortgage are free to drop coverage altogether, but both of these strategies leave a homeowner to major expenses if their home is heavily damaged or destroyed. 

Here are a couple of ways homeowners could be underinsured:

Low coverage limits: In most cases, your lender will require that you carry enough coverage to rebuild your house but there are often options to lower your coverage levels which can lead to you being exposed financially if your home is severely damaged. 

As inflation has pushed up the cost of labor and building supplies, it is also possible that your previous coverage levels are no longer enough to repair your home after a major incident. Some homeowners may be underinsured and not even be aware of it. 

Missing coverages: In many states there are policy-add-ons that either extend coverage limits or cover a specific type of peril. As an example, flood or earthquake damage is excluded from a standard homeowners policy which means you must be carrying a separate policy to be protected against these specific perils. If you are not carrying a flood or earthquake policy, you will have to cover all damages related to these perils out of pocket.

In some states, windstorm and hail damage may also be excluded from a standard homeowners policy, requiring you to purchase a rider or separate policy to cover these damages and if you don’t have this coverage those costs would fall to you. 

While cutting or lowering coverages is one way to slash your premium, it is never a good idea to be underinsured as you can end up being on the hook for tens of thousands of dollars in costs if your home is severely damaged.

The best advice is to check with your insurance agent regarding your homes risk and how much coverage you should carry.

Why is home insurance getting more expensive?

There are a number of reasons that the cost of homeowners insurance is rising. As climate change takes hold more frequent and severe storms are doing extensive damage, leading to more claims, straining insurance company’s finances. According to the Insurance Information Institute, insurers paid out an average of $1.10 for every $1 in premiums collected in 2023. 

In addition to more frequent storms, inflation has pushed up the cost of both labor and building materials, leading to higher rebuilding and repair costs, insurers pass those costs onto policyholders vial higher premiums. 

As affordable coverage becomes difficult to locate, homeowners may have to consider insurers of last resort in some states or lowering their coverages to keep their premiums affordable. 

According to Bankrate data, average cost of homeowners insurance is $2,151 in the U.S. However, individual rates will vary dramatically depending on a variety of factors which include the location, construction type and age, and the homeowner’s claims history and credit history. 

How risky is it to be underinsured?

If your home is damaged or destroyed by a major storm, you will be on the hook for any costs beyond your coverage limits. As example, if your home is insured for $200,000 but it ends up costing $300,000 to rebuild it after a tornado destroys it, you will need to cover $100,000 in costs. 

Here are a few ways to avoid being underinsured. 

Review your policy: Review your policy on a yearly basis or if you have made significant improvements to your home. Ask your agent to make sure you are properly covered and if your premium is too high consider shopping your coverage with a variety of different insurance companies. 

Know your replacement cost: Check the replacement cost of your home on a regular basis to make sure your coverage levels are appropriate. Building costs can escalate quickly which can lead to you being underinsured. 

Protect your home with additional coverages: If you live in an area that is prone to natural disasters such as flooding or earthquakes, you will need to carry additional coverages to be fully protected.