A large reason why people purchase home insurance is to cover expenses related to damages to their home that they may not be able to afford out of pocket. If a bad storm sweeps in and causes thousands of dollars in damage to your home, home insurance can help you bear that cost.
But what happens if a disaster leaves your home uninhabitable or even completely destroyed? Will home insurance still cover you?
In short, yes. Home insurance should provide a large amount of assistance when it comes to recovering after such a disaster. It is a little more complicated than that, however, and your policy won’t always cover what you think it will. This is primarily due to the 80% rule in home insurance.
What is the 80% Home Insurance Rule?
The 80% rule in home insurance refers to the total replacement cost value of your home in comparison to how much home insurance you carry.
The total replacement cost value of your home is not the same as its market value. Instead, it refers to how much it would cost to completely rebuild your home after a disaster, including building and material costs. In general, it is recommended that you carry enough home insurance to cover 100% of your home’s total replacement cost value. While you can get away with lower coverage, this is only true if you carry 80% or more.
This is because home insurance compensation is not purely based on the damages and the insurance you carry, but also the insurance you should be carrying. For total coverage, you must carry at least 80% of your home’s total replacement cost value in insurance. Carrying less can mean having gaps in your coverage when it comes to filing a claim after a disaster.
For example, say that the total replacement cost value of your home is $400,000. You purchase an insurance policy that covers $240,000. A bad storm sweeps in and causes $200,000 in damage to your home. Since $200,000 is less than $240,000, you may think all of the damages are covered. Unfortunately, this may not be the case.
In this case, you insured your home with 60% of your home’s total replacement cost value ($240,000 out of $400,000). Since this is less than the required 80%, your compensation will instead be calculated based on how much insurance you should have been carrying. With a total replacement cost value of $400,000, your home should be insured with $320,000. Since you only carry $240,000, the amount of compensation you receive will be calculated based on this amount compared to how much you should be carrying, which is $320,000. This means that the amount of coverage you purchased will be divided by how much you should be carrying ($320,000 divided by $400,000) which, in this case, is 80%. This means that your insurer will only provide compensation for 80% of the damages. 80% of the $200,000 in damage is $160,000, which unfortunately leaves you responsible for the remaining $40,000 out of pocket.
It is important to speak with an insurance agent if you have any questions about the replacement value of your home or how much your home insurance policy covers. Every home is different and any changes you may make to the home before an incident can affect the home’s total replacement cost value. If you make significant improvements, for example, you should notify your insurance agent and adjust your insurance policy. If you don’t, you may no longer meet the 80% rule for your home insurance since the value of your home has changed.
Without the right amount of coverage, you could face hefty expenses out of pocket even after receiving compensation from your home insurance policy.
What Do You Do When You Can’t Live in Your House?
While your home is being rebuilt after a disaster, you and your family will generally need to find temporary shelter. Thankfully, many home insurance policies include Additional Living Expense coverage. This insurance provides compensation for living expenses while you are temporarily unable to live in your home after a disaster. This may include money for a hotel stay for a certain length of time and other necessary living expenses.
Keep in touch with your insurance agent throughout the claims and rebuilding process. Being open and honest can help the process go faster, smoother and ensure that you will be back in your home quicker after a disaster.