When you are thinking of buying a new home, your most immediate concerns are probably things such as finding the right neighborhood for your family, checking out schools, and considering commute times.
Once you find an area that suits the family’s needs, attention turns to finding a home that is in your price range, securing preapprovals for a mortgage, tax estimates, and other cost considerations.
An important factor in this part of the home buying process is figuring out how much you will need to budget for home insurance.
What factors go into estimating homeowners insurance cost?
Estimating your home insurance cost will include its location, building materials and age of the home, and even things such as how far away the fire department is and the location of the closest fire hydrant. Information specific to you will be considered too, such as your payment and claims histories.
With so many different aspects influencing a premium, it can be difficult to guess or estimate the premium cost on a new home in a new neighborhood.
What is the rule of thumb for calculating home insurance?
According to the Insurance Information Institute (III), the two biggest factors that affect your premium are local rebuilding costs and your home’s square footage. Based on this, you can get a preliminary understanding of how much homeowners insurance you will need by multiplying the square footage of the house by local building costs per square foot. This is just a starting point, and there are many other factors that could influence the final total. Your personal property, valuables and collections, and any upgraded materials used in your home will affect the cost of your premium.
Homeowners might come across references to what is known as the “80% rule” when researching homeowners insurance costs. The 80% rule states that homeowners will need replacement cost coverage for their home in an amount equal to 80% of their home’s total replacement cost to be considered fully covered by their homeowners insurance company.
In practical terms, this means that if the cost to rebuild your home and replace your belongings is $400,000, you would need replacement cost coverage in the amount of at least $320,000 to be considered fully covered.
Remember that there is a difference between how much you pay for a home, which is its market value, and the cost to rebuild. Your insurance company is looking at what it may cost to rebuild your home in the event that it is destroyed by a covered peril, and not what the market cost of homes are in your area.
How can I calculate how much property insurance I need?
When trying to calculate how much property insurance you will need, consider the two parts of your homeowners insurance coverage.
One consideration is the “dwelling,” which is the structure of your home and any associated buildings, such as a garage.
The second is your personal property, which is all of your “stuff,” such as your furniture, clothing, and electronics. Think of the dwelling as the house you are buying and the personal property is everything you will be moving into the home.
Your premium is based on the estimated costs to replace everything that makes up these two components. To calculate how much property insurance you need, start by making two lists: one list includes details and features of your dwelling, and the second list is a home inventory of your “stuff.”
Dwelling List
For your dwelling list, include:
- The age and style of your home
- Square footage
- Materials used in building
- Any upgraded features, such as granite countertops and hardwood flooring
- Any improvements or additions
- External structures, such as garages, sheds, or gazebos, etc.
- The number of bathrooms
- Special features, such as fireplaces, arched doorways or windows, or any other custom elements that might be costly to replace
Property List
For your property list, include the following items, with purchase receipts if available, or replacement cost estimates:
- A room-by-room list of major furniture elements
- Clothing
- Sports equipment
- Electronics
- Kitchen equipment
- Any specialized collections such as art, guns, or other collectibles
To accurately determine the replacement cost for the dwelling list, you’ll need to speak to either an insurance agent or someone very familiar with building costs in the area the house is located. For the property list, you should be able to add up the totals, based on either receipts or estimates (or, most likely, a combination of both) and determine what it would cost to replace your belongings.
A caution on personal property—don’t try and just guess what dollar amount might sound like enough to replace your belongings. Homeowners frequently underestimate the amount of property they own, and underestimate the cost of replacing those items, particularly if you have to buy them new—and all at once.
Your insurance company will likely ask if you want your belongings to be insured at either an actual cash value rate, or replacement cost rate. Here’s the difference between the two: actual cash value (ACV) is determined by cost minus depreciation, while replacement cost is what it would cost to purchase the same or similar item, new.
For example, if your living room and all of the furniture in it is destroyed by a fire and you have an ACV policy, your insurance claim would be determined this way: the cost of all of the furniture, minus depreciation, and then minus your deductible. A claim filed under replacement cost is: the current cost of the furniture that needs to be replaced, minus your deductible. The difference between these two claims could be thousands of dollars.
How do you estimate homeowners insurance costs before buying a house?
The simplest way to find out how much you may be spending on home insurance premiums is to gather quotes. Before buying a house, collect your information and contact the experts at Rate Insurance. With access to more than 100 top carriers, they can help you select the coverage that is right for you, at the best price.
Disclaimer:
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate Insurance does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate Insurance. Rate Insurance, its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
