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What is the 80 Percent Rule in Homeowners Insurance?

If you're not careful, underinsuring your home can leave you paying a large bill.

If your house burns down, homeowners insurance typically covers the entire claim as long as the homeowner has dwelling coverage for more than 80% of the house's replacement value. If anything happens to your home, your provider determines the amount they'll payout on your claim by first seeing whether or not your premium covers that minimum. Anything less leaves you at risk.

How Being Underinsured Hurts You
If you do not meet the 80% rule, when you go to file a claim, you will have a coinsurance penalty. Let's look at an example to see what this means for your wallet:

  • You purchase a fixer-upper home at a discount for $280,000 market price
  • To rebuild the house from the ground up would cost $400,000 in replacement value
  • Kitchen fire causes $101,000 in damages

Scenario 1: You were a responsible homeowner and bought a home insurance policy with $400,000 in dwelling coverage, covering the full replacement cost of the home.

Fire claim for $101,000 in damages
The policy has $1,000 deductible

The coinsurance penalty is $0

You Pay: $1,000
Insurance Carrier Pays: $100,000


Scenario 2: You insist you know more than your insurance agent, and only buy a policy with $280,000 in dwelling coverage, covering 70% of the replacement cost.

Fire claim for $101,000 in damages
The policy has $1,000 deductible
The coinsurance penalty is $12,500 = $100,000*(280,000/(80%*$400,000))

You Pay: $13,500
Insurance Carrier Pays: $87,500

By cutting corners on your insurance bill and underinsuring your home, you now get stuck with a $12,500 bill. The greater the difference, the higher the costs to you.

What's even more shocking is the majority of homeowners are underinsured.

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Why Would A Homeowner Underinsure Their Home?

Roughly 60 percent of homes across the nation are underinsured by nearly 17 percent. This shockingly high number means that many homeowners face potentially huge losses should something terrible happen. What causes this to exist?

False Savings: Sometimes, people choose a cheaper option upfront because it feels like they're saving money. However, when it comes to insurance, the opposite can often happen. Saving $10 - $50 a month on a policy may seem like a great idea until something terrible happens, and you're left paying much more out of pocket.

Inflation: Inflation varies around 2 percent each year. With cost inflation, the cost of rebuilding your home tends to increase over time as labor and materials become more expensive. As a result, your coverage may slowly fall below the 80 percent threshold, leaving you vulnerable.

Home Improvements:  Homeowners often renovate and add on to their homes. According to a Harvard University study, homeowner spending on improvements and repairs will approach $340 billion, an increase of 7.5 percent from last year. Renovations and restorations add value to a home. If you don't have your home appraised after renovating or improving, your policy may leave you short of coverage.

How Can You Avoid Being Negatively Affected by the 80 Percent Rule?

Talking to your insurance agent and keeping them up-to-date on your home is the best way to stay fully protected. Inform your provider about any renovations or additions you make to your home. Your premium will most likely increase, but so will your coverage.

You can also add an inflation guard coverage endorsement onto your homeowners insurance policy. Inflation coverage adjusts your policy with inflation, so you remain fully covered without having to remember to update your dwelling coverage each year.

Now you know how to avoid the coinsurance penalty!

At your service,
Young Alfred