Underinsured: How to Know if You Have Enough Homeowners Insurance Coverage

When it comes to an investment as large as your home, it pays to protect it.

Your home mortgage represents one of the most significant debts ever. The same is true for every other homeowner you know. Isn't it wild to hear that 2 out of 3 homes in the U.S. are underinsured? According to Nationwide Insurance, the average amount a home is underinsured is 22%. Some, though, are underinsured by 60% or more.

What does it mean to be underinsured?

Your home is underinsured if you don't have enough insurance coverage to rebuild it if it's fully destroyed. And if you think to yourself, "I'm confident my insurance would let me know if I'm underinsured," you may want to think again. While some agents conduct regular policy reviews with their clients, most do not.

If you have a loan on your property, your mortgage lender likely requires that you carry homeowners insurance. After all, it wants to protect its investment. However, it's possible that your lender only requires you to carry enough to pay your loan off if it's destroyed. Let's say you owe $175,000 on your mortgage and carry $200,000 in coverage. That's great; you can pay your mortgage if a peril destroys the property. However, there's another issue at play.

What if the rapidly-rising price of construction means it will cost $400,000 to make the home safe for habitation? Rising construction costs are one of the reasons so many Americans are underinsured. Simply put, our insurance policies sometimes fail to keep up.

You want a policy that can keep pace. If your insurer tells you not to worry because your policy has a built-in inflation guard, don't allow them to drop the subject. While built-in inflation guards are great when inflation rates are stable, this year has shown us how atypical rates can become.

Read more: Learn more about full replacement coverage.

Have you updated your insurer?

The Hanover Insurance Group commissioned The Harris Poll to research home renovations. The Harris Poll found that one-third of consumers do not realize they need to inform their insurance company when they're renovating.

Leaving your insurance company out in the cold regarding renovations can easily lead to being uninsured if something catastrophic happens.

Check your liability coverage

You're underinsured if you're not carrying enough liability insurance to cover all that could happen in and around your home. Let's say you've added a pool or trampoline, and a few months later, a visitor is injured. If you've failed to let your insurer know that you've made those additions, it does not have an obligation to cover any liability losses you suffer. And that includes getting sued by the injured party.

If you've adopted a dog, let your insurer know. While some insurers don't discriminate based on breed, a growing number of home insurers now exclude dog breeds that are considered dangerous. Ideally, you'll call and check with your insurer before bringing home a new pup.

Here's a list of dog breeds that are typically excluded from homeowners insurance:

• Akitas
• Alaskan Malamutes
• Any wolf breeds
• Chow chows
• Doberman pinschers
• German shepherds
• Great Danes
• Pit bulls
• Presa Canarios
• Rottweilers
• Siberian Huskies
• Staffordshire terriers

As of 2023, five states have banned the practice of insurance denial based on your dog's breed. They are:

• Illinois
• Michigan
• Nevada
• New York
• Pennsylvania

Personal property coverage

Personal property coverage protects your home's contents if they're damaged or destroyed. Usually, coverage limits are set as a percentage of dwelling coverage. Let's say your personal property coverage is 50%, and your dwelling coverage is $400,000. If your home burns to the ground and everything is lost, the insurance company will pay up to $200,000 to replace personal property.

And remember, if you've purchased or received items of value, you'll need a rider or endorsement added to your policy to help protect them.

While considering riders

Ensure you're well-insured by thinking about which perils will likely drain your bank account. For example, do you have an insurance rider that covers sewer and sump-pump backup? Either issue could cost you thousands of dollars.

What about wind and hail coverage? In some states, damage due to wind and hail is covered under a standard policy. In others, it is not. Make sure you know whether you carry the coverage. If not, it's worth asking for a quote.

While you're at it, look at riders that cover energy surges, floods and earthquakes, and potential losses to a home-based business due to peril.

Finally, if you really want to rest easy tonight, ask about full replacement coverage for your home and personal belongings. That way, you're guaranteed to be made whole if your property is damaged, destroyed, or stolen.