When it comes to home insurance, there are a lot of terms and conditions that new homeowners aren’t aware of, such as the 80% rule. The 80% rule in home insurance refers to the amount of home insurance you must carry in order to remain completely covered.
How It Works
The 80% rule is calculated based on your home’s total replacement cost value. This is not the same value as your home’s market value. Instead, the replacement cost value of your home is how much it would cost to completely rebuild the home after a disaster, often including labor costs. 80% of this value should be covered in home insurance.
The reason is that most insurance providers won’t offer full compensation unless the homeowner has at least 80% coverage. For example, say your home’s total replacement cost value is $300,000. You purchase $100,000 in home insurance. A bad storm sweeps in and causes $20,000 in damage. While you may think the damage is covered because $20,000 is less than $100,000, this unfortunately isn’t the case. $100,000 is much less than 80% of your home’s total replacement cost value, which in this case is $300,000. So instead of covering all of the damages, the insurance provider will calculate how much compensation you will receive based on how much insurance you should have been carrying.
In this case, you should have been carrying at least $240,000 in home insurance, which is 80% of your home’s $300,000 total replacement cost value. The formula to calculate how much compensation you receive is: (Amount of home insurance carried) divided by (Amount of home insurance that should have been carried) then multiplied by the damage costs. In this case, you would divide $100,000 by $240,000 and multiply that number by $20,000. $100,000 divided by $240,000 is about 0.4166. Multiplied by $20,000, the amount you may receive in compensation is around $8,333. This leaves you to pay the remaining balance, which is around $12,000.
Ideally, it’s recommended that you purchase 100% of your home’s total replacement cost value in home insurance to guarantee you have coverage. As you can see, not having enough coverage can leave you with a hefty chunk of repairs to pay for out of pocket.
How Do You Know Your Home’s Total Replacement Cost Value?
There are online calculators that can help you calculate the total replacement cost value of your home. You will need the cost of your home’s:
- Exterior fixtures (decks, patios, pools, etc.)
- Indoor fixtures (bathroom and kitchen fixtures, appliances, cabinets, etc.)
- Personal belongings
For example, say your home is quoted at $100 per square foot and your home is 1,500 square feet. This puts your home’s basic replacement cost value around $150,000.
You can get estimates on different aspects of your home by contacting local home-builders. Also be sure to speak with your insurance agent about the total replacement cost value of your home.
Are Personal Belongings Included in the 80% Rule?
If you have personal belongings coverage, your insured items may be included in your home’s 80% replacement value. Important or expensive items especially should be considered on your policy, as they will be harder to replace.
Keep in mind that some personal belongings have limited coverage under a basic home insurance policy. Items such as art, furs, electronics and jewelry may need additional policy floaters in order to be completely covered.
Personal belongings coverage comes in two options on your home insurance policy: actual cash value or replacement cost value. An actual cash value policy will cover only the cash value of your belongings while accounting for depreciation, meaning that as the value of your items goes down, so does the amount of compensation you can receive. If you purchase a laptop for $1,000 and it has depreciated to $500 by the time you need to file a claim for theft, you will likely only receive $500 in compensation.
A replacement cost value policy compensates for loss of an item without accounting for depreciation. Instead, this type of policy pays to replace your items with one of similar or identical value. These policies are generally more expensive but allow you to more easily replace your lost or damaged belongings.
Speak with your insurance agent about how much home insurance you need to protect your home and belongings.
Also Read: What Does Home Insurance Not Cover?
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