There are three areas where we find the most problems with peoples' insurance portfolios. One of those is the limit of insurance people choose on their home insurance policy. In at least 7 out of 10 policies that we review we feel that consumers do not have enough insurance to rebuild their home.
Think of your Dwelling Limit as being the amount of money your insurance company will pay to repair/rebuild your home if it is damaged by a loss covered by the policy. It is easy to project what would happen if you ran out of insurance money before your home was fully rebuilt!
It seems to us that most people don't choose enough coverage on their home insurance for the following reasons:
1. They confuse market value with the reconstruction value. This is especially dangerous at a time like this when market values have dropped, but we aren't convinced that the costs to rebuild homes have dropped in a corresponding fashion.
2. They rely too much on another insurance agent's suggestion of a Dwelling limit without that agent having ever see their home.
3. They fell victim to an agent who wanted to write the insurance policy so badly that they drove down the Dwelling limit in order to shrink the premium. Yikes!
4. They have had the same policy for many years without ever having an updated review based on today's construction cost realities.
This is another example of the danger of putting insurance ahead of risk management. If you jump right into buying home insurance and choosing a limit of coverage on your house based on no assessment of your risk, then you might be unintentionally choosing to have your home rebuilt without the kitchen, or having to liquidate your IRA to help pay for the job to be completed.
Imagine instead having the confidence that you have a legitimate amount of insurance on your home, giving you the freedom to put more of your other investments to better use than reserving them to pay for a partial home rebuild.
