Is Your Homeowners Enough for a Disaster?

Most people don't give much thought to their homeowners insurance policy unless a tree punches a hole in their roof or they come home from vacation to find that the  basement has been transformed into an indoor swimming pool.

But if your homeowners insurance claims have been limited to those types of calamities, count yourself among the fortunate. Thousands of families in Joplin, Tuscaloosa and other tornado-stricken communities have seen their homes flattened and the contents destroyed.

And sadly, many of these homeowners will soon discover that their insurance won't cover all of their rebuilding costs.

The good news is that typical homeowners insurance covers damage from tornadoes. Other natural disasters, such as floods and earthquakes, aren't covered under standard policies.

But while 96% of homeowners have insurance, 64% of homes are undervalued for insurance purposes, according to a 2008 study by Marshall & Swift, a research firm.

Even if you don't live in Tornado Alley, you should review your policy periodically to make sure you could recover from a catastrophe. Typical homeowners coverage falls into three categories:

Replacement cost covers the cost of repairing or replacing your home, based on a set dollar limit. The problem is that it may not reflect increases in the cost of construction and labor since you took out your policy. If a disaster strikes your entire community — as was the case in Joplin — higher demand could push up the cost of building materials and labor, says Amy Danise, managing editor of Insure.com.

Extended replacement cost is when the insurer agrees to pay a certain percentage above the replacement cost to account for inflation, Danise says. For example, if your replacement cost is $250,000, extended replacement cost coverage would pay up to 120% of that, or $300,000.

Even with this adjustment, you could come up short, particularly if it has been a long time since you updated your coverage. There are several online tools you can use to calculate the current replacement cost of your home. You can get an estimate at AccuCoverage.com for $7.95.

•Guaranteed replacement cost covers the total cost of replacing your home, no matter how much prices have increased since you took out the policy, Danise says. This type of coverage is more expensive and increasingly difficult to obtain because insurers want to control their costs, she says.

In addition to these levels of coverage, many policies include an "inflation guard" provision that automatically adjusts your coverage limit when you renew your policy to reflect increases in construction costs. Some policies include this as part of standard coverage; for others, it costs extra, says Jeanne Salvatore, spokeswoman for the Insurance Information Institute.

Most homeowners policies also cover lost or damaged possessions. Typical coverage ranges from 50% to 70% of the amount of insurance you have on the structure of your home. For example, if your policy provides up to $250,000 to rebuild your home, you could get an additional $125,000 to $175,000 to replace your belongings.

Again, though, there are different levels of coverage. You can insure belongings for their actual cash value, or the replacement cost. Actual cash value means what it says: If you lose a 10-year-old TV, your payment would be based on the value of a 10-year-old TV. Replacement cost coverage would get you enough money to buy a new TV.

Replacement coverage costs about 10% more, but it's worth it, Salvatore says, because most household items depreciate quickly.

All homeowners should do an inventory of their belongings to figure out how much insurance they need and make it easier to file a claim, Salvatore says. Store a record of your inventory on a secure website, in a safe deposit box or with a relative or friend.

The Insurance Information Institute offers free home inventory software at KnowYourStuff.org. The National Association of Insurance Commissioners has a free home inventory iPhone app. To find it, search under myHome.

Factors that can affect the cost of rebuilding a home:

•Local construction costs

•Square footage

• Exterior wall construction (frame, veneer, brick or stone)

•Style of the house (ranch, colonial)

•Number of bathrooms and other rooms

•Type of roof and materials used

•Other structures on the premises, such as garages, sheds

•Fireplaces, exterior trim and other special features, such as arched windows

•Whether the house, or any part of it (such as the kitchen) was custom built

•Improvements, such as a second bathroom, kitchen renovation or other additions that have added value to your home

Source: Insurance Information Institute