There’s a chance you could be paying for more home insurance than you need and not even know it. If that’s the case, you’re probably throwing money down the drain—money that could be spent on something else. So what happens if your home is overinsured? Keep reading to find out.
How much insurance is enough
Deciding on the proper amount of homeowners insurance coverage isn’t as daunting as it sounds. The best way to start is to determine the amount of Dwelling coverage you need. Dwelling coverage protects you against damage to the physical structure of your home, as well as attached structures like a garage.
You typically should have enough Dwelling coverage to rebuild your home from scratch in case it is completely destroyed. Your home’s location, size, age and features all impact how much coverage you need. A potential way to determine that amount is to speak with your independent insurance agent or a local builder.
Once you’ve established the proper Dwelling amount, that number will automatically serve as the basis for other coverage amounts. For example:
| Coverage Type | Typical Coverage Limit |
| Personal Property | 50% to 70% of Dwelling amount |
| Other Structures | 10% of Dwelling amount |
| Loss of Use | 20% to 40% of Dwelling amount |
Keep in mind, if you need more coverage, you can seek to adjust your policy limits or add optional coverages.
Signs that you’re overinsured
Of course, having ample homeowners insurance is a good way to protect your property if disaster strikes. However, it’s possible to have more insurance than you really need. That’s called being overinsured.
How do you know if you’re overinsured? Here are three things to look for:
- Excessive policy limits
- Unnecessary optional coverages
- Overlapping insurance policies
Your policy limits are excessive
Generally speaking, it is important that you base your Dwelling coverage amount on your home’s replacement cost, not its market value. Here’s the difference:
| Replacement Cost |
|
| Market Value |
|
Ordinarily, your home’s market value will be higher than its replacement value. Therefore, if you base your Dwelling coverage amount on the market value, you could end up with too much insurance—and an inflated premium.
You have unnecessary optional coverages
Another sign that you may be overinsured is if you have an optional coverage that you likely won’t need. For instance, if you live in a low-risk flood area, it may not be worth the added cost to have a separate flood insurance policy. Remember, coverage amounts should be based on need.
You have overlapping insurance policies
You might find yourself with overlapping coverage if you switch homeowners insurance companies before your old coverage ends. The key is remembering to instruct your old carrier to cancel the prior home policy once your new policy is in place; if you don’t, they will automatically renew the policy. Obviously, having two homeowners insurance policies that cover the same property leads to wasted money—so cancel your original policy when switching.
Other ways to lower your premium
If you’re an over-insured homeowner, you’re probably paying too much for your home insurance. Fortunately, you might be able to lower your premium by making sure you have the right Dwelling coverage amount and removing any unnecessary or redundant coverages. But why stop there?
Here are some other ways to reduce your home insurance premium:
- Compare quotes
- Raise your deductible
- Take advantage of discounts
- Bundle your insurance
Compare quotes – Maybe the best way to lower your home insurance rate is to compare quotes from multiple carriers. Try shopping around annually right before your policy renews. You can get quotes online or through an insurance agent.
Raise your deductible – An easy way to lower your homeowners insurance premium is to raise your deductible. Smart homeowners explore this option. Not surprisingly, more and more people are raising their insurance deductible every year.
Take advantage of discounts – Insurance carriers offer a variety of discounts to help you lower the cost of your home insurance policy premium. For example, you could save if you choose paperless billing or if your home is equipped with internet-connected devices that alert you in case of theft, fire or water damage.
Bundle your insurance – Bundling refers to buying home and auto insurance from the same insurance carrier. Most carriers will offer customers a discount if they bundle. It’s another simple way to potentially lower your insurance premium.
Umbrella insurance can help
To make sure you’re adequately covered without being over-insured, you may want to get an umbrella insurance policy. Umbrella insurance provides additional liability coverage for your homeowners or auto policy.
Generally speaking, insurance companies require that you have a minimum of $300,000 in liability coverage on your home insurance policy before you can purchase umbrella coverage.
Umbrella coverage kicks in after you’ve reached your liability coverage limits on your main policy. For example, let’s say you or a family member is responsible for an accident that causes $500,000 in damages to someone else. In this case, your home insurance could pay up to $300,000 in liability, and then your umbrella insurance could pay the additional $200,000.
How much does umbrella insurance cost?
If you’re uneasy about your liability coverage limits, an umbrella insurance policy can give you additional protection at minimal cost. Depending on your insurance company, an umbrella policy that gives you $1 million of coverage may cost you an additional $200 to $400 a year—or about $1 a day.
