People have been asking, “with home prices rising so fast, do I need to up my home insurance?” Spoiler alert – yes you may need to up your coverage, but not for the reason you think. So today we’ll talk about your homeowner’s insurance, including a quick review of what’s covered and how to make sure you have enough coverage.

The housing market has been really hot lately. That means the value of your home may also be higher now. Surprisingly the market price of your home doesn’t determine the amount of your coverage, you need if your house is damaged or destroyed. Homeowners insurance covers replacement of the building, it has no relation to the value of the land that it sits on. The cost of replacing your home is most affected by cost of building materials and labor, not how “hot” the real estate market is.

But, it happens that rebuilding, costs have really jumped up lately too. So if you insured your home for X dollars when you bought it, that might not be enough to repair or replace it now if you have a loss, even with replacement cost coverage. Most insurance requires you to maintain a coverage amount that is at least 80% of the current replacement cost. So if you insured your home for $150,000 when you bought it and construction costs have gone up and now the cost to replace your home would be $200,000. If a fire does $100,000 worth of damage to your home, the insurance company would pay $75,000 and you would be on the hook for $25,000. That’s an ugly surprise. If you had been covered for at least $160,000 which is 80%, the insurance would have picked up the whole $100,000 tab.

So what am I saying? Do a regular checkup with your insurance provider. Here’s a few other tips and areas to discuss with them.

The amount of your insurance is coverage for your house. Separate structures like a detached garage, shed, or barn are typically covered up to 10% of your home coverage. So if you have $200,000 of home coverage, your other buildings are insured up to $20,000. This is fine for most people, but if you have farm with a large barn or a detached garage with and mother-in-law suite, you may want additional coverage. Again talk about it with your agent or insurance company.

Homeowner’s insurance also covers your personal property, usually up to 70% of the value of the home. Coverage applies to everything in your home besides the house itself— furniture, appliances, clothes, electronics, and even food in the fridge. I recommend you keep an inventory of these items. One of the simplest ways to do this is to walk through your home and take pictures of everything. Some expensive items, like jewelry, art, musical instruments, collections, and even gold bullion or cash have very limited coverage, much lower than their actual value. If you have anything like this, check your policy for details about how much they will reimburse and look into additional coverage.

One of the most important things to know about your policy coverage is if it’s Replacement Cost Coverage (the best) or Actual Cash Value (avoid). For your belongings you can think of Replacement Cost coverage as the cost to buy new replacements for what you lost. Actual cash value is its value based on what it would cost to buy something of the same age and wear and tear. Think of actual cash value as what you could get for the item on eBay. Your home is similar. The insurance company will depreciate, that is lower the amount they would pay out based on the age of the home, if you have actual cash value coverage. I definitely recommend you purchase Replacement Cost coverage.

And one more note, read your policy to see under what circumstances, called perils, will your insurance cover a loss. Most insurance covers a wide range of scenarios. But, standard policies DO NOT include damage from floods, you have to buy a separate policy for that. I do recommend flood insurance.