Underinsured, Overinsured, Or Just Right? How To Choose Homeowners Insurance

Whether you’re choosing a new homeowner’s policy or simply adjusting your existing one, you might feel a little like Goldilocks. Are you paying for too much coverage? Or too little? Finding that “just right” amount can feel like a huge task — particularly if you’re also worried about closing on a new home or finding a new policy without causing a gap in your coverage.

When buyers are in those time crunches, it’s remarkably easy to end up either over-insured and wasting money on coverage you don’t need or worse, underinsured and at risk in catastrophic disasters like wildfires or hurricanes. 

Homeowner policies have an overwhelming amount of options to consider. For most buyers, the most important (and confusing) part of your policy is the “Dwelling Insurance” or “Coverage A.”

Dwelling insurance covers the cost to repair your home if it’s damaged or even completely destroyed. Not only is Coverage A one of the most significant safeguards your policy has against disaster, but it also dictates your limits for other coverages.

Coverages B and C, which cover detached structures on your property and your personal belongings, are tied directly to Coverage A. Coverage B, for example, is typically only 10% of Coverage A.

This makes it difficult to adjust your coverages individually and makes it even more important to consider how much Coverage A you need. 

Since you're reading this, you're about to learn how one of the choices you make — even before determining your total amount of coverage — could help get your estimate “just right.” Coverage A exists in a few different formats (depending on your state and carrier).  

Actual Cash Value (ACV) 

The first type of Coverage A, ACV, is often “too little” for insurance buyers. Your premiums might be lower, but it’s because your claims are all subject to depreciation. With ACV, if you need a roof replacement, you won’t receive the total cost of paying for that new roof from your insurance carrier. You’ll get the current “cash value” for your roof or the cost of the roof minus its age and condition. That means more out-of-pocket expenses and unpleasant surprises when you file a claim. 

Replacement Cost

Replacement Cost is often where many buyers start to find their best fit. This type of coverage protects your property or structures for what it would cost to replace them at time of your claim. It also means that what you buy is what you get for replacing your home if you need a complete rebuild.

That’s why it’s important to re-evaluate how much you buy in replacement cost coverage every few years. Suppose labor or material costs increase significantly, but your Coverage A doesn’t. In that case, you could be looking at a huge gap between your insurance payout and what it costs to completely rebuild in a catastrophe. 

Extended Replacement

An add-on to Coverage A, Extended Replacement policies help build in a buffer for increased cost.

Instead of purchasing more Coverage A, you buy a specific extended limit that becomes available if your rebuilding costs rise past your Coverage A. It could be 10% more, or even 50%, but it provides additional protection against unexpected or rising costs.

Extended Replacement is beneficial if you live in an area where natural disasters are common, as the cost to rebuild goes up significantly if everyone needs to rebuild, or if you live somewhere where costs are difficult to estimate.

Guaranteed Replacement 

Another add-on, Guaranteed Replacement does exactly what it says. It guarantees your home’s replacement to its current levels, even if the cost is past your Coverage A limit.

This premium add-on is not available everywhere or by every carrier, but for homeowners who are looking for the ultimate peace of mind, it can be a great option. As a premium add-on, however, the price tag is often steeper and can fall into the “too much” category for many homeowners.

Homeownership is filled with what can feel like a million choices. Picking the right type and amount of Coverage A for your homeowners insurance isn’t quite as fun as picking out new fixtures, but it’s one way to ensure you’re protecting all of those (much more interesting) investments.

If you’re still feeling a bit like Goldilocks and looking for your personal “just right” option, try out Coverage Cat’s optimization for home insurance!