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Implications of Under-Insuring Your Home

Home insurance value

One of the most important things about home insurance that we can’t stress enough is having the proper limits of coverage.

You might not think that having all the very specific details in place, or worrying about the complete accuracy of your home insurance application matters, but it does. When it comes to home insurance, it’s crucial to have your home insured for the proper replacement value.

We’re going to look at what can happen when you under-insure your home…

The co-insurance clause

You might not be aware of it, but if your home insurance does not align with the actual replacement cost of your home, there is a co-insurance clause that allows your insurance provider to apply a penalty to the under-insured.

Let’s say for instance that your home is worth 200K but you opted for a home insurance plan for a worth of 100K. Something happens and you incur a loss of 50K. Since you are underinsured, the insurer applies the co-insurance clause and only pays you out 50% of the amount of loss. So instead of getting paid out for the actual loss or damage, you would only get paid out 25K in this case. Yikes!

This is a common example of what can happen when the co-insurance clause is applied, but it’s important to note that different home insurance policies will have different stipulations in the event of under insurance. Look through the details of your plan to determine what percentage the penalty is based on. The degree to which you are under-insured matters as well and the amount will affect how severe the penalty is.

Protect yourself

Now that you are informed, you can take the steps to insure that you are properly protected.

First and foremost, get the correct valuation of your home. Provide your information with as many details and as much accuracy as possible. If you’re not sure about something, ask! Work with your insurance broker to ensure that he or she has every bit of information needed to give you the appropriate plan. This is no place to cut corners and no place to work with a broker that does not work diligently to answer all your queries and understand the value of your home. If you’re not sure about the quality of service you are getting or the plan you are being offered (or currently have), do some further research and get additional an home insurance quote (or several).

Next, ensure that your details stay up to date. So if you make any updates or upgrades to your home, contact your insurance agent. If you’re renovating, you have to get in touch with your provider as there are various implications for your coverage (you can learn more about that here). Consider inflation rates and how that affects the value of your home. Take into account anything that will change what your home is worth and how much it will cost to replace.

The mantra of better safe than sorry is nowhere more relevant than when it comes to insurance. Please avoid the dangers of under insurance!


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