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Key Takeaways:<\/strong><\/p>\n Have you heard about the \u201880% Rule\u2019 as it relates to your homeowner\u2019s insurance? Maybe you have heard it referred to as the \u201980\/20 Coinsurance Rule\u2019?<\/p>\n Either way, the 80% Rule suggests that your homeowner\u2019s insurance needs to cover at least 80% of the total replacement cost of your home\u2019s current value. If it doesn\u2019t, you could be subject to penalties for being underinsured or underreporting the value of your home.<\/p>\n In fact, some states, e.g., California, Connecticut, Florida, Louisiana, and others, have laws requiring homeowners to insure their homes for at least 80% of the home\u2019s total replacement costs. Additionally, most (if not all) mortgage lenders require homeowners to adhere to the 80% rule at the least and may require increases in policy coverages when necessary.<\/p>\n As home values have soared in most communities within the last few years, now is a good time to provide a comprehensive guide to help you negotiate the complex landscape of home insurance and avoid costly mistakes. Here are some key explanations and timely tips to meet the 80% home insurance requirement and protect your home in the future.<\/p>\n The 80% Rule for homeowner\u2019s insurance states that homeowners should maintain insurance coverage that meets or exceeds 80% of the home\u2019s total replacement cost value<\/strong>. Replacement cost is the cost of building materials, labor, and all related expenses needed to rebuild the home to it\u2019s current state, including upgrades, finishes, and personal property, e.g., appliances. This is not the same as Market Value.<\/p>\n Ensuring that your home is insured at 80% or better also provides protection should you incur partial damages. If you home is underinsured, your insurance carrier will apply a compliance penalty for partial damages that can significantly reduce your coverage and pass the financial burden on to you instead. Later in this article, we explain the penalties and provide examples of the financial burden they present.<\/p>\n Defining replacement cost vs. market value is crucial when targeting precise coverage amounts. If you use the wrong value, you can end up overpaying for coverage or not protecting your home adequately.<\/p>\n Here is a breakdown of the differences between replacement cost value and market value:<\/p>\n Replacement Cost Value<\/strong><\/p>\n Market Value<\/strong><\/p>\n Understanding the difference between replacement value and market value is important, e.g., a home in an ultra-desirable location could have a market value of $500,000, but the replacement cost to rebuild the house might be only $300,000. This will impact your insurance premiums.<\/p>\n Understanding the difference between replacement cost value and market value is important for three reasons:<\/p>\n Calculating your home\u2019s replacement value is crucial to understanding your obligations regarding coverage and the 80% Rule. For informational purposes, here is an outline of how home replacement value is calculated. Talk with your insurance agent about a specific review of your home\u2019s costs associated with replacement and how it affects your premiums.<\/p>\n Step 1<\/strong><\/p>\n Determine your home\u2019s total living area square footage, including finished and unfinished spaces.<\/p>\n Step 2<\/strong><\/p>\n Estimate local construction costs per square foot. These costs can vary depending on location, the types and quality of materials, and the labor market. Currently, construction costs can range from $100-$150 per square foot for basic construction, up to $250+ per square foot for high-end or custom construction. Contact a local contractor for a more accurate cost estimation that\u2019s in line with the costs in your area.<\/p>\n Step 3<\/strong><\/p>\n Determine any special or unique features that bring additional costs, such as:<\/p>\n Step 4<\/strong><\/p>\n Factor in any labor and contractor costs, costs for shipping materials, and any costs for building code updates.<\/p>\n Step 5<\/strong><\/p>\n Use a reliable appraisal tool, either from your insurance agent or a professional appraiser, to determine an accurate dollar amount. Keep any calculations, assumptions, and records to justify where you numbers are coming from.<\/p>\n Step 6<\/strong><\/p>\n Repeat the process every one to three years to ensure that your homeowner\u2019s insurance coverage is accurate.<\/p>\n Surprisingly, for something this important, there is relatively little discussion about it from mortgage lenders and insurance companies. When homeowners fall short of the 80% rule, they have significantly increased their financial risk and may find themselves in a devastating situation they didn\u2019t know was possible.<\/p>\n Here are several situations that would find a homeowner in an avoidable situation:<\/p>\n When you fail to comply with the 80% rule, it can result in significant financial penalties like reduced payouts when you file a claim. So, if you file a claim and your insurance carrier determines that you are not compliant with the 80% rule, they can apply a coinsurance penalty to your claim. This coinsurance penalty will reduce your reimbursement for partial losses.<\/p>\n The coinsurance penalty formula is:<\/p>\n Payout = (Actual Coverage\/Required Coverage) X Damage Amount \u2013 Deductible<\/p>\n As an example:<\/p>\n ($240,000\/320,000) X $50,000 = $37,500, minus deductible<\/p>\n Additional possible consequences for partial claims can include:<\/p>\n We encourage a proactive approach with respect to all insurance coverage. Whether it\u2019s homeowner\u2019s insurance or auto, health, or life insurance, get comfortable asking questions and being involved in the decision-making process to ensure your risk is well managed.<\/p>\n Here are some tips to help you avoid penalties with regard to your homeowner\u2019s policy:<\/p>\n If you ever experience a major catastrophe with your home, having adequate homeowner\u2019s insurance is the difference between landing on your feet and potential financial devastation.<\/p>\n While obtaining insurance seems like a one-and-done deal, it\u2019s important to review your coverage, bundles, discounts, and costs for insurance annually to ensure that you have full coverage on the things that are most important to you and your family.<\/p>\n If you haven\u2019t taken the time to review your homeowner\u2019s policy and update the replacement costs, now is the time to make that happen. Complying with the 80% rule is a crucial element of a well-thought out financial plan and will protect your financial wellbeing in the event of an emergency.<\/p>\n Contact einsurance.com<\/a> to learn more about homeowner\u2019s insurance<\/a> and find the best quote.<\/p>\n\n
Home Insurance and the 80% Rule Explained<\/h2>\n
Replacement Cost Value vs. Market Value<\/h2>\n
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\n Replacement Cost Value vs. Market Value<\/strong><\/td>\n<\/tr>\n \n Consideration<\/strong><\/td>\n Replacement Cost Value<\/td>\n Market Value<\/td>\n<\/tr>\n \n What it Covers<\/strong><\/td>\n Cost to Rebuild the Structure<\/td>\n Entire property (structure + land)<\/td>\n<\/tr>\n \n Includes Value of the Land?<\/strong><\/td>\n No<\/td>\n Yes<\/td>\n<\/tr>\n \n Determined by<\/strong><\/td>\n Cost of Construction<\/td>\n Real Estate Market Trends<\/td>\n<\/tr>\n \n Price Dependence\u00a0<\/strong><\/td>\n Tied to Material and Labor Costs<\/td>\n Tied to Housing Demand and Location<\/td>\n<\/tr>\n \n Insurance Basis<\/strong><\/td>\n Used for Determining Coverage<\/td>\n Not Typically Relevant with Insurance<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \n
How Home Replacement Value is Calculated<\/h2>\n
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Falling Short of the 80% Rule<\/h2>\n
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Penalties and Consequences for Non-Compliance<\/h2>\n
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How to Avoid Penalties and Problems Relating to the 80% Rule<\/h2>\n
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Final Thoughts<\/h2>\n