How much homeowners' insurance do I need?

[NinetyFour]

I currently pay over $600 per year for homeowners' insurance with American Family.  I got a quote from Travelers' for about $500, but I wonder if I can do even better by increasing deductibles, for example.

My house was recently appraised at $295,000.  I actually have a "main house", which was originally built in 1898, has been added on to at least once, and is 725 square feet.  (Tiny!) I have another, separate, dwelling on the same property, with about 625 square feet.   (Even tinier!) Currently, I rent out the main house and live in the other dwelling.

My rebuild amount on my current policy is $142,000 and my deductible is $1000.  should I change things up?  What about all of the other options?

I don't have my coverages in front of me right now, but I will include them in a future post.  I would appreciate any general guidelines about what coverage is really important and what coverage isn't really worth the money.

Thanks.

[Myrmida]

Was your house appraised at $295,000, or the house + land.  You don't need to insure the land (unless there are some really unusual circumstances).  Even if your house burns down to the foundation, you will still own the land.  Does your insurance include the fact that you rent the house out?  You want to make sure that you are covered for that.  It would be terrible if your tenants did something that caused damage to your home and then you found out that your insurance won't cover it.  Why not call up your insurer or Traveler's and just tell them that you are interested in reducing the cost of your insurance, and what ways there are to accomplish that?  Sometimes, those customer service people are helpful.

[gillstone]

Two words: North Dakota. 

Yes the housing is crappy and it'll be a little lonely (unless you prefer a 20:1 male to female ratio) but the money is good and they aren't just hiring field workers.  Local governments, small businesses, company offices all have openings and are hiring anyone who has a pulse. As a bonus, if you get on working in the oil fields, most companies will provide housing for men without families .  It may not be the career start you hoped for three years ago but opportunities can show up anywhere.  Also a couple years of work and frugality and you can pay off those loans and be free of debt.

[Eric]

Two words: North Dakota. 

Yes the housing is crappy and it'll be a little lonely (unless you prefer a 20:1 male to female ratio) but the money is good and they aren't just hiring field workers.  Local governments, small businesses, company offices all have openings and are hiring anyone who has a pulse. As a bonus, if you get on working in the oil fields, most companies will provide housing for men without families .  It may not be the career start you hoped for three years ago but opportunities can show up anywhere.  Also a couple years of work and frugality and you can pay off those loans and be free of debt.

So he can reduce his homeowner's insurance by moving to North Dakota?  There has to be an easier way than that!  :)

[huadpe]

If you have a solid emergency fund or stash going, max out your deductibles.  $5000, $10,000, whatever you can get it to.  You want insurance for things you can't afford to replace.  You (probably) can't afford to replace your home.  And you definitely can't afford a slip and fall lawsuit for millions of dollars.  But you can afford $10k.   You want insurance only for the portion you can't afford to cover yourself.  Insuring things you can afford means you're lining the insurer's pocket.

[NinetyFour]

Thanks for the responses so far.

Myrmida--I guess it's house + land that was appraised at $295K.  And that includes the second dwelling. 

I am new to the whole rental thing.  Do I need to specifically tell my insurer that I have a tenant?

Myrmida--yes, I guess I could call my current insurer and ask how to lower my costs.  Good suggestion.

Here are the details of my current coverage:

Dwelling: $142,200
Personal Property, on premises: $106,700
Personal Property, off premises: $100% subject to limitations
Loss of Use: Actual Loss
Deductible Amount--All Peril: $1000
Personal Liability: $500,000
Medical Expense: $5000
Backup of Sewer: $5000 Limit, $1000 Deductible
Dwelling extension coverage: up to 10% of the Dwelling amount
and there are some other additional protection/endorsements

How do I know what it would cost to rebuild the main house and the second dwelling?

Oh, and huadpe, my emergency fund is not where I would like it do be right now, but in the next couple of years, it will grow.

Thanks again.

[huadpe]

Thanks for the responses so far.

Myrmida--I guess it's house + land that was appraised at $295K.  And that includes the second dwelling. 

I am new to the whole rental thing.  Do I need to specifically tell my insurer that I have a tenant?

Myrmida--yes, I guess I could call my current insurer and ask how to lower my costs.  Good suggestion.

Here are the details of my current coverage:

Dwelling: $142,200
Personal Property, on premises: $106,700
Personal Property, off premises: $100% subject to limitations
Loss of Use: Actual Loss
Deductible Amount--All Peril: $1000
Personal Liability: $500,000
Medical Expense: $5000
Backup of Sewer: $5000 Limit, $1000 Deductible
Dwelling extension coverage: up to 10% of the Dwelling amount
and there are some other additional protection/endorsements

How do I know what it would cost to rebuild the main house and the second dwelling?

Oh, and huadpe, my emergency fund is not where I would like it do be right now, but in the next couple of years, it will grow.

Thanks again.

If you can't afford a big deductible yet then keep it as you have it.  The only thing I'd change would be to increase the personal liability component.  Especially with tenants on the property, you want to be protected from a big lawsuit (which squarely falls into the "things you can't afford" zone.

[Another Reader]

Your lender will determine the minimum insurance required.  Usually it's the amount of the loan.  That may or may not cover the cost to rebuild, so you may need more.  The insurance company has a cost estimator program that they use to determine the replacement cost.  The deductible should be based on what you can afford to pay in the event of a loss.  You must disclose that part of the property is rented, or you may not be covered.  Standard homeowner policies do not cover tenants.  You may need to change carriers if American Family won't cover the property because of the rental.

[MountainFlower]

I had an appraisal last summer for a refi.  I know that the cost to rebuild is AT LEAST 200K higher than the appraisal value (custom log home).  Appraisal and replacement cost can be very different. 

[Nords]

Dwelling: $142,200
Personal Property, on premises: $106,700

Where do those numbers come from?

If it's the cost of building the house in 20xx, or the tax assessment, then it's probably based on some average $$/sq ft.  That doesn't necessarily apply today.

Some insurers give you a worksheet to show your floorplan, special features ("Bowling alley?"), and upgrades (granite countertops).  Others will use some proprietary combination of sales value, purchase appraisal, and tax assessment.

You may also want riders on your policy for (1) rebuilding costs and (2) code upgrades.  Hawaii is especially vulnerable to these situations, because the cost of building materials triples after every hurricane (assuming you can even find a contractor).  In addition, the code is always evolving to add more requirements.  If you have to rebuild then you have to incorporate all of the code improvements, and it can add as much as 25% in labor & materials.  You're also going to have some of your own personal code upgrades, like wiring walls with CAT6 cable or adding more electrical circuits to the rooms. 

Is that personal property "actual cash value" or "replacement value"?  Many personal property insurers will pay you ACV and only reimburse you for RV when you send in the receipt.  My spouse and I maintained about $70K of personal property insurance on a 4BR house, and we were perpetually getting whined at to boost our coverage to the "average personal property coverage for your size of house".  Meanwhile spouse and I compared the ACV of our personal property to the price that we'd pay to replace everything through Craigslist... and we canceled our personal property insurance.  Even better, that permanently ended the whining. 

[Hayden Frys Mustache]

Just browsing through old insurance threads and I had a question -

How accurate are the replacement calculators the insurance guys use to suggest coverage? I bought my house and quarter acre for 160k (appraised for that as well), building is assessed at $120k, and their replacement calculator says I need 220k in replacement coverage. On top of that, they try to roll in a 3% coverage increase each year which I have to undo each year. I'm pretty sure I've got too much insurance.