If you buy homeowner’s insurance based on market value, you may have too much coverage. Just because your home is worth $400,000 doesn’t mean it will cost $400,000 to replace it. Even in case of a total disaster, you won’t have to replace the land and you probably won’t have to replace the foundation.
The more coverage you have, the higher the premiums you’re paying, of course.
On the other hand, don’t under-insure: the face amount of your homeowner’s policy should be at least 80 percent of the replacement value of your home. Otherwise, you may get only partial reimbursement when you file claims.
Moreover, it’s easy to fall behind if you have improved your house through remodeling or addition. Your $400,000 house becomes a $500,000 house and your $320,000 worth of dwelling coverage won’t meet the 80 percent test. You’d be in a “co-insurance” situation, meaning that you would be responsible for paying a portion of any claims.
To prevent such a problem, tell your insurance agent whenever you add value to your house. Make sure you have enough coverage to qualify for guaranteed replacement coverage, which will pay you enough to rebuild your home in case of a catastrophe.