Homeowners Insurance: The 80% Rule
When it comes to your home, making sure you’re adequately insured is of the utmost importance. Despite this, many homeowners are unaware of the “80% rule” for home insurance and, as a result, find themselves underinsured. Understanding the 80% rule can help you protect yourself and your home.
Understanding the 80% Rule
There are two valuation options available when purchasing insurance on your home. Typically, homeowners can elect to insure their home and personal property on an actual cash value basis or at replacement cost. Actual cash value refers to the amount needed to repair or replace an item, minus depreciation. Replacement cost refers to the amount needed to repair or replace your damaged property with materials of similar kind and quality without deducting for depreciation.
Most insurance companies require homeowners to purchase replacement cost coverage worth at least 80% of their home’s replacement cost to receive full coverage. Many homeowners follow the 80% rule when first purchasing their home but are unaware of the importance of adjusting their coverage to keep up with the changes inflation and home improvements can make to their home’s overall replacement cost. As a result, these homeowners are surprised after a disaster or loss when an insurance company doesn’t cover the total cost of replacing their home. Without having at least 80% of the replacement cost of your home insured, your insurance company may only pay the difference between 80% of the replacement cost of your home and the amount of coverage you purchased.
What Affects the Replacement Cost of My Home?
It’s essential to understand what can affect the replacement cost value of your home. While every policy varies, some of the most common things that affect your home’s replacement cost value are:
- Square footage of your home
- Home renovations and improvements
- Cost of replacing materials
- Labor costs in the event repairs are needed
- Value of interior and exterior components
Making Sure You’re Not Underinsured
Securing adequate coverage for your home, especially as the replacement cost value changes over the years, is essential in protecting your home. Contact RBN Insurance Services today to ensure you have sufficient coverage.