The Most Important Decision You Need To Make When Buying Homeowners Insurance
Nothing is more important when you buy homeowners insurance than correctly calculating how much of your home you want to insure
. The figure has nothing to do with the market value of your home; it's based on how much it would cost you to rebuild your home if it were totally destroyed today. So you could sell your home for $175,000, but it would only cost $130,000 to rebuild it, then that's the most you'd need to insure it for. (Remember, you're just insuring your home, not your land.)I recommend insuring your home for 100 percent of the replacement cost. This is the most expensive type of insurance, but I feel it's worth it. A good alternative is to insure for 80 percent of the replacement cost. You'll still receive the full amount it costs to replace any part of your home that is damaged. And since it's much more likely that part of your home would be damaged as opposed to your entire home being damaged, this is a fine alternative.
What you want to avoid, however, is insuring for anything less than 80 percent of the replacement cost. If you do, you'll only be paid for the "actual cash value" of your loss. That means depreciation is taken into account. So if your 10-year old carpeting is destroyed in a fire, your insurance company will pay you about what you could get if you sold it in a garage sale (in other words, a pittance.). And you'll have to buy brand new carpeting at probably three times what it cost you to buy the original carpeting. If, on the other hand, you had insured the home for at least 80 percent of the replacement cost, you'll receive not what you paid for the original carpeting, but what it would cost to replace the carpeting today.
Also, be sure to get replacement coverage on the contents of your of your home as well. This will guarantee that if the eight-year old sofa you bought for $300 is damaged, you'll receive enough money to buy a brand new sofa of the same type
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