Why your homeowner's insurance might not pay

For all you homeowners out there!

Check that your homeowner's insurance policy does not have a coinsurance clause!

What is property coinsurannce?

It is a clause in your homeowner's insurance contract that makes you pay if your policy does not cover at least, lets say, 80% of the current value of your home.

For example: Let's say you bought your house back in 2015 for $300,000, and you got it insured for $270,000 (90% of the home's worth).

You feel responsible because you figure you are good and covered.

Seven years go by and you watch the housing market in your area heat up! When you check your address on Zillow or Redfin, you are pleasantly surprised! Your $300,000 house...

is now valued at $500,000!

Of course, you still have the same insurance on it, but worst case scenario, you figure you will get the full of your $270,000 policy and then have to make up the difference, right? Nope!

Now your insurance covers less than 80% of the value of your home. $270,000 is only about 54% of the current value of your house.

A disaster happens and your house has $200,000 worth of damage. You figure, that's less than your $270,000 policy should cover, but that coinsurance clause changes everything!

Now instead of getting the $270,000 of coverage you paid for, you only get $135,000.

Your insurance company will take the amount you are insured for ($270,000) and divide it by the 80% minimum written in th clause ($400,000). Then they multiply this by the cost of the damage ($200,000).

$270,000/$400,000 x $200,000 = $135,000

Your $270,000 policy will only pay $135,000!

In short, check if your homeowner's insurance policy has a coinsurance clause. If it does, make sure you are covered to above the minimum listed (usually 80% but could be more). Or just change your insurance.

Come back next week for another surprising tidbit from a student of financial counseling!

Sources:

Over a year ago, I started this blog having no formal education in finance, just a teacher/parent with the ability to read books, google stuff, and draw some pictures. Now I am studying for the Accredited Financial Councelor exam. Every week I will bring you something I have learned! Come back next week for a list of my textbooks!