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Editor’s Note: This is the final part of a three-part series exploring the rising cost of home insurance. Here are parts one and two. When you own a home, you want to protect your investment. But home insurance premiums are rising fast. And if you’re looking for ways to reduce this growing financial burden, you could be taking risks you’re not aware of. Here’s how to make sure searching for a lower rate doesn’t involve forfeiting the coverage you need.

Compare Apples to Apples

First off, if you’re shopping around for a new policy, make sure you only compare quotes for the same type and amount of coverage. That way you’ll know if an insurer is offering less protection to be more competitive on price and be able to make a fully informed decision about whether the trade-off is worth the savings. For each type of coverage, consider the coverage limit, the maximum the insurer will pay for a specific type of loss. Also review the deductible — the amount you have to pay before the insurer will — and any specific exclusions that narrow the scope of coverage. “When consumers focus on premiums rather than coverage limits, insurers have a very natural incentive to cut prices by offering less insurance,” Tony Cookson, a business school professor at the University of Colorado Boulder, told the school’s campus news publication earlier this year. Take the study Cookson and his colleagues did on the insurance coverage of homeowners who lost their houses in a 2021 wildfire in Colorado. After examining almost 5,000 insurance contracts, they estimated that 74% of those homeowners didn’t have enough coverage to rebuild their home, and in 36% of cases, their policy covered less than three-quarters of the cost. Their deduction: Homeowners don’t always realize when they’re sacrificing coverage amounts to get a lower price.

Understand the Coverage Types and Limits

Part of making informed comparisons involves understanding the components of a policy. Standard home insurance typically reimburses you after a theft, accident or disaster (except for a flood or earthquake,) and includes four main types of coverage:

•   Dwelling coverage: to repair or rebuild the house itself

•   Personal property coverage: to repair or replace belongings

•   Additional living expenses (ALE) or loss of use coverage: to help pay for a hotel or other living arrangement if your home is uninhabitable

•   Liability coverage: to protect you if someone sues you over an injury or damage to property For dwelling and personal property coverage limits, it’s important to understand the difference between Replacement Cost Value (RCV), which would cover the cost to replace the house or items at current prices, and the Actual Cash Value (ACV), which would only reimburse you for what your home or items are worth at the time of the loss, deducting for age and wear and tear. Most dwelling coverage uses RCV, but you’ll usually have a choice with personal property. (RCV for personal property can cost about 10% more.) Either way, confirming is the best way to avoid surprises. Note: Your dwelling coverage limit is not based on the market value of your home. The market value, or the price you’d list if you were selling it, is often higher and reflects the value of your house and land as well as market conditions.

What Does It Mean to Be Underinsured?

Being underinsured refers to not having enough coverage for all your costs when you have a claim. In other words, there ends up being a gap between the actual costs of fixing or replacing your home or belongings and what the policy will reimburse you for. Underinsurance is arguably riskiest when there is a total loss from a fire, hurricane, tornado or other catastrophe. Although most people won’t ever face this kind of catastrophe, industry estimates suggest two-thirds of U.S. homes are underinsured for a total loss, according to the consumer advocacy group United Policyholders. But being underinsured can also be a problem when there isn’t a total loss. Maybe the dwelling coverage limit isn’t enough given inflation, rising construction costs or building code changes. (More on this below.) Or you didn’t tell your insurer you upgraded a kitchen or bathroom or finished the basement. Or perhaps as some insurers scale back standard coverage, you’re just unaware of certain exclusions or deductibles that can leave you vulnerable.

Determine If You Have Enough Coverage

If you have a mortgage, the lender will almost certainly require you to carry homeowners insurance. At a minimum, you’ll have to have at least enough dwelling coverage to pay off your loan, though both insurers and policyholder advocates recommend insuring the full Replacement Cost Value. When you’re comparison shopping, each insurer will have its own estimate of the cost to rebuild. But these may only be as accurate as the default figures programmed into an insurer’s software, so United Policyholders recommends getting a second opinion. You can use:

•   A knowledgeable independent agent or broker

•   A building contractor who comes to your home to give an estimate

•   Your own math — divide the limit by a standard per-square-footage replacement cost for your area

•   An online software program like e2value’s Pronto An accurate estimate is especially important because insurers may calculate other coverage limits as an automatic percentage of the dwelling coverage limit. Personal property is usually 50%-70% of the dwelling coverage limit, while Additional Living Expenses is often 20%, according to the Insurance Information Institute.

When to Add Extra Coverage

The cost to rebuild a home is fluid, especially if a disaster triggers a sudden increase in building costs. While some policies will include an inflation adjustment, you may want to consider adding Extended Replacement Cost Value coverage if you live in a disaster-prone area. This will typically pay 20% or more over the limit, depending on the insurer. Other additional coverage options include:

•   Ordinance or Law: If new building codes or laws that were enacted since your home was built add to the cost of rebuilding.

•   Scheduled Personal Property: If high-value possessions such as jewelry, antiques, or fine art exceed your personal property limit.

•   Earthquake Insurance: Because earthquakes aren’t a covered disaster in standard home insurance policies.

•   Flood Insurance: Because floods aren’t a covered disaster in standard home insurance policies.

Higher Deductibles

Although a higher deductible might technically leave you underinsured, it can actually be a pretty safe way to reduce your premiums. Just make sure you would be able to afford the additional cost if you need to file a claim. After all, insurance involves hedging your bets and weighing the trade-offs. The more coverage you have, the more you’ll pay but the more peace of mind you’ll have. The less coverage you have, the more risk you’re taking. In the end, it’s all about striking the right balance.

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