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Know Your Insurance

When it comes to your home, making sure you’re adequately insured is critical. Despite this, many homeowners are unaware of the “80% rule” for home insurance and, as a result, are underinsured when trying to replace their personal property after a loss. Understanding and applying the 80% rule can help you protect yourself and your home.

The Basics

When purchasing house insurance, there are two value choices available. Homeowners typically have the option of insuring their home and personal property for Actual Cash Value or Replacement Cost. The cost required to repair or replace an item, minus depreciation, is referred to as the actual cash value (the decrease in the value of your home or personal property due to normal wear and tear). The amount required to repair or replace your damaged property with materials of similar kind and quality, without deducting depreciation, is referred to as the replacement cost.

To receive full coverage, most insurance companies require homeowners to purchase replacement cost coverage worth at least 80% of their home’s replacement cost. For example, if you paid $275,000 for your home, you’d need to carry insurance for at least $220,000 for the insurance provider to fully cover any potential claims.

Many homeowners follow to the 80% rule when purchasing their first home but are unaware of the importance of adjusting their coverage to keep up with the impact that inflation and home upgrades can have on their property’s overall replacement cost. As a result, when a disaster or loss occurs, some homeowners are surprised when their insurance company does not cover the whole cost of replacing their home. Your insurance provider may only pay the difference between 80% of the replacement cost of your home and the amount of coverage you obtained if you do not insure at least 80% of the total of the replacement cost of your home.

The 80% Rule in Action

Assume you bought your property for $220,000, or 80% of its replacement cost, when you originally purchased it. Then you upgraded your home, bringing the replacement cost up to $350,000. For your insurance provider to completely cover claims, you’ll need to upgrade your coverage to reflect 80% of the new replacement cost of your home, which in this example would be $280,000. Your home is damaged by a storm for $100,000, but because you upgraded your home insurance to $280,000, the insurance company covers the entire cost of the repairs, except your deductible.

Home renovations, can help you make sure you’re properly covered, even if your home’s replacement cost increases.

What Affects the Replacement Cost of My Home?

Because the 80% rule is directly affected by any changes to your home’s replacement cost, it’s important to understand what can affect the replacement cost value of your home. While every policy varies, some of the most common things that affect your home’s replacement cost value are:

  • Square footage of your home
  • Home renovations and improvements (e.g., changing flooring, appliances and fixtures; updating a roof; or installing new windows)
  • Cost of replacing materials
  • Labor costs in the event repairs are needed
  • Value of interior and exterior components

Making Sure You’re Not Underinsured

Securing adequate coverage for your home, especially as the replacement cost value changes over the years, is essential in protecting your home and your wallet. Contact INSURICA today to make sure you have sufficient coverage under the 80% rule for homeowners’ insurance.

© 2021 Zywave, Inc. All rights reserved. This Know Your Insurance document is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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