When it comes to your house, it’s critical to ensure that you’re properly insured. Despite this, many homeowners are unaware of the “80% rule” for home insurance and, as a result, are underinsured when replacing their personal belongings after a loss. Understanding and adopting the 80% rule can help you protect yourself and your house.
When acquiring home insurance, there are two valuation options:
- Actual Cash Value – the cost of repairing or replacing an item, minus depreciation (the decrease in the value of your home or personal property due to normal wear and tear).
- Replacement Cost – the cost of repairing or replacing your damaged property using materials of comparable kind and quality without deducting for depreciation.
In order to acquire complete coverage, most insurance companies require homeowners to purchase replacement cost coverage worth at least 80% of their home’s replacement cost.
The 80% Rule in Action
When first buying a house, many people follow the 80% rule, but don’t realize how important it is to alter their coverage to keep up with inflation and home upgrades, which can affect their property’s overall replacement cost.
For example, if you bought your home for $275,000, you would need to have coverage for at least $220,000 for the insurance company to fully cover any potential claims. You would need to have insurance for at least $220,000 for the insurance company to fully cover any potential claims. However, let’s say you renovated your house, and these improvements significantly raised the replacement cost of your property to $350,000. For your insurance company to fully cover claims, you’d need to increase your coverage to reflect 80% of the new replacement cost of your home, which would be $280,000 in this case.
Regularly evaluating your coverage amounts, particularly after house modifications, helps you ensure that you’re appropriately covered, even if the replacement cost of your property rises.
What Affects the Replacement Cost of My Home?
Because any changes to your property’s replacement cost has a direct impact on the 80% rule, it’s critical to understand what can affect your home’s replacement cost value:
- 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
Know Your Insurance - Understanding the 80 Percent Rule for Home Insurance
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