As a homeowner, there’s nothing worse than finding out that your home insurance claim is not covered when you need it the most. It’s a huge disappointment after years of faithfully paying premiums. This disconnect often occurs because we neglect to review our home insurance policies regularly. Terms like Actual Cash Value (ACV) and Replacement Cost Value (RCV) can be confusing, leading us to overlook important details.
But as a Financial Samurai, being prepared for the worst is essential. Whether it’s safeguarding your family from a home invasion, spotting fraudulent car collisions, or anticipating potential policy changes, readiness empowers you to face any challenge head-on.
A Review Of Your Home Insurance Policy
If you have a mortgage, your bank mandates insurance coverage that you pay for. However, if you own your home outright, you are not legally required to maintain coverage. Here’s an example of a home insurance policy costing $3,900 annually, breaking down each component:
Dwelling Coverage (Coverage A, $1,771,000)
Dwelling coverage refers to the amount required to repair or rebuild your home. In this instance, the coverage is $1,771,000 for a 4,800 square foot residence, equating to $369 per square foot. Calculating this and comparing it to current construction costs in your area is crucial.
In San Francisco, $369 per square foot is considered low, with the industry average closer to $602 per square foot. It’s imperative to know your city’s standard. If your area experiences rising property values and construction costs, your dwelling coverage may become insufficient over time, necessitating proactive adjustments.
Personal Property (Coverage C, $708,400)
Personal property insurance covers your belongings such as furniture, electronics, and clothing. In this case, the coverage is $708,400, 40% of the dwelling coverage. This amount may seem excessive for minimalists with few high-value belongings.
In the event of damage, Replacement Cost coverage replaces damaged items at current prices, while Actual Cash Value considers depreciation. Understanding these differences is crucial when filing claims.