Natural disasters wreaked havoc across America in 2020, causing billions of dollars in damage. And the damage was doubly devastating: If your home was destroyed in 2020, you may have lost your office, your classroom and your gym as well. The COVID-19 pandemic meant that about 61 million Americans stopped their daily commute, with many transitioning to working, studying and exercising at home.
As 2021 begins, ValuePenguin recommends running a homeowners insurance checkup. Planning ahead can help you determine if you're overpaying or if you need more coverage — whether it's to protect your new Peloton bike or the standing desk you bought for a home office.
Here are some questions you should answer to make sure you have sufficient coverage:
What type of policy do you have?
Though we often refer to "homeowners insurance" generically, there are different types of homeowners insurance that offer different kinds of coverage.
- An HO-1 policy only covers damage done by a peril explicitly named in the policy. Unlike the other forms of homeowners insurance, it usually does not cover any damage to your personal belongings inside your home, only damage to the structure of the home, and it usually does not include liability coverage.
- An HO-2 policy only covers damage done by a peril explicitly named in the policy. It covers damage to your personal belongings inside your home, as well as the structure of your home.
- An HO-3 policy is the most common type of homeowners insurance. All damage done to the structure of your home is covered unless the damage was the result of a peril specifically excluded from your policy. By contrast, only some damage done to your personal property is covered; the peril that caused the damage must be specifically named in the policy.
- An HO-5 policy covers all damage to the structure of your home and your personal property unless the peril that caused the damage was specifically excluded from the policy.
- An HO-8 policy is intended for an older home with a replacement cost greater than the actual cash value of the home. It only provides coverage when damage results from a named peril.
The limited coverage an HO-1 policy provides makes it an unpopular option; only 1.5% of homeowners insurance policies are HO-1. If you do have an HO-1 policy, however, you should consider whether you're truly comfortable paying to replace all of your possessions out of pocket: your TVs, furniture, laptops and more. Next, consider the sum of all of your financial assets that would be at risk if someone were to successfully sue you for an injury.
The other types of homeowners insurance protect you from these risks. If you have one of these policies, use the start of 2021 as an opportunity to consider the perils that could damage your home and the levels of coverage you want to have to protect yourself and your property.
How much coverage do you need for your personal property?
Most homeowners insurance policies cover damage to personal property. It's easy to select the same coverage levels when renewing a policy, but the reality is that many policyholders accrue more property over the years, whether it's an expensive item like a new laptop or a series of smaller items like kitchen appliances and dishware.
The best way to ensure you have sufficient personal property coverage to replace your belongings is to do a home inventory.
Simply put, a home inventory is a detailed and comprehensive list of every item in your home. That might sound like a lot of work, but it's a crucial step if you want to obtain quality replacements for your destroyed items in a covered loss. For example, if a hurricane destroys your home and your brand-new standing desk, your insurer must replace it — but unless you provide the exact name and model, it's possible you'll wind up with a cheaper product.
We recommend you include the following details about every item on your list:
- Name and model of each item
- A serial number, if available
- A description of the item
- The cost of the item
- A receipt with place and date of purchase, if available
After completing your inventory, total the value of your property and reassess your coverage limits. Insurance companies often set personal property coverage limits at 75% of your dwelling coverage by default. If your home is worth $200,000, for instance, then your personal property limit would be $150,000. An inventory can help you decide whether that's sufficient to cover everything you own, including items you've bought over the past year.
What are your policy's limits?
More time spent at home in 2020 caused many Americans to embark on renovation projects. To ensure that these additions are protected, you'll want to reassess the limits on your dwelling coverage as well.
While home insurance policies cover the structure of your home, the fine print of your policy will reveal how much you'll actually be reimbursed if your house is destroyed and you need to rebuild. Policies describe their dwelling coverage limits with one of three terms, and the payout that’s implied by each term can make a huge difference to homeowners.
The three types of coverage limits
- Actual cash value (ACV): The ACV is the market value of your house, minus any depreciation. It's possible that the value of your land may have increased since you bought it, but specific elements of your house, such as the plumbing or floorboards, have aged and therefore may have depreciated in value. Because of this, the ACV likely won't cover the entire cost to rebuild your home with new materials.
- Replacement cost value (RCV): The RCV is the amount it will cost to rebuild your house at the current prices for labor and materials. A policy that covers your home's RCV will have higher premiums than one that covers only the ACV, but it could provide a substantial amount of additional reimbursement if you need to replace all or a part of your home. However, a policy that covers the RCV is still subject to limits.
- Guaranteed replacement cost (GRC)/extended replacement cost (ERC): The GRC/ERC of a home is like the RCV but with a guarantee that the insurance company will pay a certain percentage beyond your policy's limits to rebuild your home. This is relevant if a regional disaster, such as a wildfire, temporarily drives up the cost of labor and building materials. However, this is the most expensive option.
Someone with ACV coverage who loses their entire house in a wildfire would likely pay tens of thousands of dollars out of pocket to rebuild. If your current homeowners insurance policy doesn't cover the full cost of replacing your home, you should consider increasing your policy limits this year. While this does raise your premiums, the extra coverage could be worthwhile if your home ever suffers significant damage.
Are you happy with your homeowners insurance company?
You may be surprised by the rates you can find if you shop around for the best rates offered by home insurance companies. However, rates alone do not imply the best deals. When shopping around, look for the factors we consider when comparing insurers, which include affordable rates, the best customer service and the highest claims process satisfaction score.
Doing a homeowners insurance checkup might not be the most enjoyable way to start the new year. But by taking the time now to reassess your coverage, you can start 2021 confident that your home is protected, no matter what the coming year may hold.