Is My Home Underinsured? Here’s How To Tell

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Think of home insurance as an umbrella. If you buy one, you should be covered when it rains if you buy one, right? But what if you open your brand-new umbrella during a storm just to find out it's riddled with holes? Not only are you soaked, but you're left wondering what your money went to in the first place.

Home insurance operates similarly. Many assume that if they have a policy, they’re protected no matter what, only to find out their policy has a lot of gaps once they really need to use it. This is referred to as being underinsured, and it’s becoming a significant problem for homeowners across the nation. In fact, it’s estimated that around 4 million homes are underinsured, many by at least 25% or more.

Make sure your hard-earned money is going to good use by learning what being underinsured means, how to tell if your coverage is lacking and what you can do to amp up your protection so you aren’t paying thousands out of pocket. Our guide below will walk you through everything you need to know.

Key takeaways:

  • Being underinsured means that your current policy isn’t robust enough to cover the costs should you need to file a claim.
  • It’s estimated that around 4 million homes are currently underinsured.

What does underinsured mean?

Being underinsured means that your current policy isn’t robust enough to cover the costs should you need to file a claim, whether your home is a total loss or you just need to replace a few stolen items.

If this is the case, you’ll have to pay a significant amount yourself, either because your replacement cost coverage wasn’t high enough or you didn’t have the right insurance riders added to your policy. Bottom line: Being underinsured is a costly mistake.

7 ways to tell if you’re underinsured

Becoming underinsured can happen more easily than you think. The cost of materials and labor is always rising, and if you aren’t reevaluating your policy every year, you likely don’t have enough coverage to pay for it all. Below are seven ways to tell if you might be underinsured.

1. You went with the minimum level of coverage

When signing your original policy, you may have gone with the minimum recommended coverage to save a little bit of money. And though the minimum coverage will still provide you with some protection, more often than not, it’s not as much as you really need.

In general, it's recommended to get enough coverage to rebuild or replace your home to at least 100% of its worth, if not more. By keeping your coverage high and getting any needed add-ons to your policy, you’ll be protected from any surprises that come your way.

2. A home inventory was never conducted

If you don’t know how much your items are actually worth, how will you know how much coverage to get? Conducting a home inventory might sound like a no-brainer, but in reality, a lot of homeowners skip it when buying a policy because it’s too much work. This can lead to some pretty severe gaps in your policy.

Make the home inventory process easier by using a home inventory app to document all your tech, furniture, and decor so you can easily let your provider know what needs replacing in the event of a disaster.

3. Insurance riders aren’t on your policy

Even if you know you have enough replacement coverage, there are still other ways to be underinsured. This includes gaps in coverage for particularly expensive belongings or protection from natural disasters. Traditional home insurance policies may not cover these things automatically, and if you don’t have insurance riders, you might be out of luck when it comes to financial assistance from your provider.

Insurance riders such as scheduled personal property and equipment breakdown coverage will provide additional protection for specific items. If you’re worried about natural disasters, you can add riders such as flood insurance or hazard insurance. Finally, if you want all-encompassing coverage, consider adding umbrella insurance for more protection.

4. You haven’t reviewed your policy in a while

While it’s not required, a best practice is to look over your policy at least once a year, especially if you’ve had any significant changes like renovations or large purchases. Another way to tell that you might be underinsured is if you can’t remember the last time you reviewed your current policy. This will ensure that you’re fully covered for the next calendar year.

5. Renovations have been completed recently

Whether you're upgrading your home to improve your mental health or just to make cooking in the kitchen a bit smarter, any renovations you undergo should be reflected in your home insurance policy. By updating your rebuilding cost or your contents coverage, you can rest easy knowing your new upgrades are fully protected in the event of a covered peril.

Wanting to upgrade your home but not sure where to start? Check out our guide to free home renovation programs for ideas and learn how to get reimbursed.

6. Labor or supply cost has skyrocketed

In the past year alone, material costs have increased an astonishing 24%, while general construction costs such as labor have risen 4.5% in that same time frame. Though COVID-19 supply chain issues are mostly to blame for this sky-high increase, these numbers still tend to rise every year, pandemic or not. Because of this, your current policy may already be outdated  (even if you reviewed it recently).

To help protect yourself and your wallet from rising rebuilding costs, it’s smart to get add-ons to your policy such as extended replacement cost.

7. You didn’t do your research

There’s no denying that the process of getting home insurance can be complicated — even more so if you’re in the process of purchasing a home while getting a policy. But failing to do proper research such as comparing quotes before getting coverage can lead to financial risk down the line.

When re-evaluating your current coverage, make sure to review each part of your policy to ensure your limits are where you need them to be. You should also get a few quotes from other providers and ask about discounts and even bundling opportunities for a cost-effective and full-coverage policy.

How do you know if you’re over-insured?

Figuring out if you’re over-insured can be complicated, as there are many factors at play. While you can calculate your rebuilding costs (the calculation is construction cost per square foot x the square footage of your home), you’ll also need to take into account demolition and removal costs, not to mention the costs to replace all the personal property you lost.

To get an idea of how much coverage you really need for your specific needs, it’s best to shop for a policy and ask each provider you speak with to review and recommend a coverage amount. That way, you’ll get an idea of how much coverage you really need straight from the experts.

What makes a home uninsurable?

A home can become uninsurable if it’s deemed uninhabitable or if the repairs required to make it liveable (due to flooding, fire, or other peril) are so high that the Federal Housing Association will not pay for the needed updates.

What should I do if I find out I’m underinsured?

If you go through the above list and discover that you’re underinsured, it’s important to act fast. Of course, we all hope that no major issues or disasters will happen, but the reality is that you never really know when you’ll need to file a claim. Because of this, the sooner you update your policy to be fully covered, the better. Give your insurance agent a call to update your coverage or shop around for a new provider to make sure you have the coverage you need. 

No one deserves to be left out in the rain. If you find your coverage is lacking, give us a call to learn how our home insurance policies can help. We won’t let you get soaked.

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