Being overinsured is a waste of money, so stop paying premiums for coverage that's not needed.
Property owners should buy homeowners insurance coverage to protect their assets. For many people, a home accounts for a significant portion of their net worth, so having enough coverage is crucial to avoid a financial disaster.
But while property owners need enough coverage to satisfy their mortgage lender's requirements and ensure that their assets are fully protected, buying too much coverage can be a waste of money.
Although it can be hard to determine how much is too much, here are some red flags that suggest a property owner may be overinsured.
Your policy limits are too high
Homeowners who have policy limits that are too high are overinsured and paying more for coverage than makes sense.
Homeowners should have replacement value coverage for both their home and their property within it, and should make sure their policy limits are set high enough to actually pay to rebuild their house and replace its contents if something should go wrong.
But, insurers won't pay more than the house costs to rebuild or more for the property than it would cost to replace it. So there's no reason to have policy limits that are in excess of what the home or property's replacement cost is. For example, if a homeowner has $100,000 of property in the home, it would not make sense to have $200,000 in property damage coverage.
Make sure to get an accurate estimation of the rebuilding cost of the house and the replacement cost of personal property and don't get a policy with higher limits than necessary.
Your deductible is too low
Homeowners must decide how large they want their deductible to be when they buy insurance on their property. The policy deductible is the money a property owner would need to pay out of their own bank account for a covered loss. Insurance kicks in after the deductible has been met and pays the remaining rebuilding or repair expenses.
Homeowners need an affordable deductible because no one wants to struggle to come up with their out-of-pocket contribution after a covered disaster. But, the lower the deductible, the higher the policy premiums will be. A property owner with a $250 deductible, for example, may be wasting money on more insurance coverage than they need if they could easily cover a $1,000 repair out of pocket.
Switching to a higher deductible policy can provide consistent premium savings. A policyholder can set aside the money they are saving on premiums in a special account to cover their deductible. Once they have enough in that account to pay their out-of-pocket expenses, any additional month they go without a claim is just pure savings.
You have unnecessary riders
Finally, homeowners who have unnecessary riders on their policies are also overinsured. Riders are add-on coverage. For example, some property owners decide to add identity theft insurance to their homeowners insurance policies. But, with strong fraud protections in place by default, identity theft protection insurance is often not worth paying for.
Ultimately, every homeowner should take the time to evaluate their insurance coverage once a year to make sure they are only paying to protect against the risks they truly want to transfer to the insurer. That way, they can avoid paying higher premiums unnecessarily for more insurance than makes financial sense.
FAQs
Bottom line. To know if you have the right amount of homeowners insurance, start by getting an estimate on rebuilding your home. From there, look at the value of your possessions, how much it would cost to live somewhere else and what you might pay if someone was hurt in your home.
How do I know if I have too much insurance? ›
Some telltale signs you're overinsured include excessive policy amounts, unnecessary coverages and duplicate policies.
What is the 80% rule in homeowners insurance? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
Can you be over insured on your house? ›
Adjust your coverage.
For example, your home may be over-insured if your coverage is based on the home's market value. Market value is the selling price of your home, which includes your land. Homeowners insurance should cover the cost to rebuild your home's structure, which will be less.
What should you not say to homeowners insurance? ›
Avoid making guesses or unsupported statements about what caused the damage to your property. Speculating can lead to inaccuracies in the adjuster's report, potentially affecting your claim.
What is the appropriate amount of insurance that you should have on your house? ›
Most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available and, increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of liability coverage.
What is an example of over insurance? ›
Over-insurance – what is it? It is basically where the property is insured for more than it would actually cost to replace. For example, say you nominate a sum insured of $1 million for the building, but the actual cost to replace it is $750,000.
What is considered excess insurance? ›
Excess liability insurance covers claims that exceed the limits of a primary insurance policy. If a business hits the per-claim or aggregate coverage limit on a particular primary policy, excess liability insurance will kick in to cover the amount in excess of the underlying policy limit.
What is the average excess insurance? ›
Compulsory excesses have also increased for accidental damage and fire claims. The average excess payable for an accidental damage claim has increased from £185 to £234 (a 26% increase), while fire claims excesses have risen by the same percentage from an average of £179 in 2020 to £226 in 2021.
What is the 80 20 rule for insurance? ›
The 80/20 Rule generally requires insurance companies to spend at least 80% of the money they take in from premiums on health care costs and quality improvement activities. The other 20% can go to administrative, overhead, and marketing costs. The 80/20 rule is sometimes known as Medical Loss Ratio, or MLR.
The 80 percent rule in homeowners insurance means that you must insure your home for at least 80 percent of the replacement cost for an insurer to cover the damages.
What is the face amount of a homeowners insurance policy? ›
The face amount of the policy (for example, $100,000) is the most you will receive if your house is totally destroyed.
Do I have too much insurance coverage? ›
It's recommended that you have enough coverage to pay off all your debt, about 10 to 15 times your annual income, and enough to pay for anticipated expenses, like your children's education. If you have more than that total amount, you're probably overinsured.
Is replacement cost home insurance worth it? ›
Replacement cost homeowners insurance may be worth considering for the contents of your home if you want to replace older items with newer ones. Like dwelling replacement cost, contents replacement cost usually has a coverage limit maximum as defined in your home insurance policy.
Should home insurance include land value? ›
The land under your house is not at risk from theft, windstorm, fire or other perils covered in your homeowner's policy. Be careful not to include land value in deciding how much insurance to buy. Including land value in your estimate will cause you to pay higher premiums.
How can I avoid overpaying my home insurance? ›
5 Ways To Avoid Overpaying On Homeowners Insurance
- Bundle insurance policies with one company. ...
- Add home improvements designed to guard against disasters. ...
- Purchase homes based on low-risk areas. ...
- Revise policies each year based on worth of possessions. ...
- Increase your deductible.
Increasing construction costs and labor shortages play a role, too. “To help pay for these higher costs, insurers have increased policy premiums on homeowners in both high- and low-risk areas,” says Pat Howard, a home insurance expert at Policygenius.
What is one way to reduce the cost of a homeowners insurance policy? ›
Raise your deductible
The higher your deductible, the more money you can save on your premiums. Nowadays, most insurance companies recommend a deductible of at least $500. If you can afford to raise your deductible to $1,000, you may save as much as 25 percent.
How many home insurance claims is too many? ›
How many home insurance claims are too many? If you've filed more than three claims in the last year, you'll likely face higher premiums, and it may become more difficult to get insurance coverage at all (via Money Crashers).
