If a disaster were to strike your home, do you know if you have enough insurance to cover your losses? Most people aren’t really sure. They find that they’re underinsured and about 75% of people underestimate how much insurance they truly need.
Should something unfortunate happen to your home, you could find yourself in a similar situation where you’re underinsured.
That could put your family and your finances at risk. Rather than do that, have the right amount of coverage from the start.
How much personal property coverage do you really need? Keep reading to find out about the importance of personal property coverage and how do determine how much you really need.
What is Personal Property Coverage?
From an insurance standpoint, the personal property consists of your personal belongings inside the home. Your clothes, electronics, furniture, kitchen supplies are all considered to be personal property.
Personal property coverage is supposed to cover your belongings in the event of a fire or theft. You pay the replacement costs up to the deductible amount and insurance will take care of the rest.
If you have a $500 deductible, you pay $500 to replace your belongings and your insurance company will pay for the rest of the replacement costs.
This is the basic assumption that gets a lot of people into trouble. Let’s take a closer look at how it works.
Homeowner’s Coverage and Personal Property
You might think that all is well because your homeowner’s policy covers personal property. This is a common assumption that people have about personal property coverage.
Personal property coverage is usually referred to Coverage C within your homeowner’s policy. If you read carefully, you’ll find that there are limits as to what is and isn’t covered.
For example, jewelry and antiques usually aren’t covered by homeowner’s policies. You’d have to get additional coverage for these items.
Some policies are written to say that your personal property will be covered at 50% of the dwelling coverage. The dwelling coverage is the cost to rebuild your home.
Other policies will only cover 20% of the dwelling. Let’s say that your insurance policy covers $250,000 to rebuild the home. Your personal property coverage would be $50,000.
Your personal property coverage will also depend on whether or not you have coverage for floods, fires, mudslides, and earthquakes.
Understanding home insurance isn’t easy. There are a lot of terms and dollar amounts hidden in insurance policies.
Most of the time, you’re trusting the word of the insurance agent. You’re hoping that they’re telling you accurate information. Rather than do that, you’re much better off educating yourself.
Calculate How Much Personal Property Coverage You Really Need
Now that you know a little bit more about how personal property coverage works, how much coverage do you need? Here’s how you can calculate your costs.
Cash Cost vs. Replacement Cost
Insurance policies are going to have some kind of language around the actual cash value of your property or the replacement cost value of your personal property.
Here’s an example to illustrate the difference between the two. You bought a top of the line TV 5 years ago just before a major sporting event. That TV cost $4,000.
The TV depreciated over time, and the actual value is now $700. Now, if you were to replace your TV with another top of the line TV of a similar caliber, the replacement costs maybe $3000.
This is a very important distinction that can really hurt you financially if you were expecting to get paid on the replacement costs but wound up with the actual costs.
What is the Cost to Replace Your Belongings?
You’ll have to go through your home and determine how much you have, what you paid for it, when, and what the cost to replace those items.
Your best course of action to make sure that you have more than adequate coverage is to keep a running inventory of your belongings and update it every few months.
There are various ways to keep an inventory, such as using a template or an app like Encircle.
Getting a Homeowners Insurance Endorsement or Floater
If you find that your personal property coverage limits and your actual belongings don’t match up, you can adjust your policy to meet your needs.
That’s usually done through a homeowner’s policy endorsement. An example of an endorsement is if your policy says that you’re to get the actual cash value of your belongings, you can get an endorsement that says you can get the replacement cost value.
If you have very expensive items, such as an engagement ring or collectibles, you’ll want to get a floater on your policy. A floater is meant for these items and will require an appraisal of the items before you get the policy.
Get An Insurance Checkup Every Year
Similar to going to the dentist or doctor for an annual checkup, you need to do the same with your insurance policy. There are a number of variables that impact your policy, and you want to make sure that everything is covered.
That’s especially true with your personal property. You may have donated or bought a number of new items that would cost more money to replace. Your personal property coverage may need to be updated to reflect these new purchases or purging of older items.
For example, if you got a new large, comfy leather chair, you want that to be reflected in your policy. It’s the same if you got a new dining room set. Keeping an inventory and updating your policy will protect you when you need it.
Personal Property Coverage
Personal property coverage is a mystery for many homeowners. They assume that the homeowner’s policy will cover everything, which often leaves them underinsured.
How much personal property coverage do you need? It depends on your current policy and the type of belongings you have.
Once you understand the fine print of your policy and take an inventory, you’ll better be equipped to make sure that you have the right amount of coverage.
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