Underinsured Homes: How Many Are There In The US?
A home is one of the biggest investments most of us will make in our lifetime. Despite this, it is estimated that up to 67% of American homes are not adequately insured. According to the CoreLogic Residential Cost Handbook, these homes are on average underinsured by around 27%. There are, however, also homes that are as much as 60% underinsured. These homeowners are risking huge financial losses if a disaster should ever strike because they might have to fork out tens of thousands of dollars from their own pockets.
What Does It Mean To Be Underinsured?
In laymen’s terms, this simply means your home insurance policy will only cover a percentage of your losses. This often happens because of coverage limits or exclusions. Let us, for example, say your home is insured for $150,000 but its actual replacement cost is closer to $250,000. If the worst happens and it is totally destroyed, you will have to pay the balance of $100,000 to get it rebuilt.
Why Do So Many Homeowners Not Have Sufficient Coverage?
There is no single cause for this. Underinsurance can (among others) be caused by the following factors:
- The property is undervalued because its value has increased significantly over the years.
- Construction costs have sky-rocketed
- The homeowner doesn’t fully understand what is covered and what isn’t.
- Homeowners who fail to inform the insurance firm about upgrades such as new rooms, another garage, etc.
- Homeowners not increasing sub-limits to realistic levels. Every home insurance policy has sub-limits for certain kinds of losses such as jewelry, furniture, firearms, electronics, etc. In case of a claim, the insurer will only pay the maximum mentioned in the sub-limit.
- Insurance firms sometimes make mistakes that cause your home to be underinsured.
- The agent failed to perform due diligence or didn’t ask all the relevant questions.
- Homeowners who mistakenly depend on the condo’s master policy. These policies might not provide adequate coverage for the homeowner’s personal property.
- Homeowners who insure their homes for cash value instead of replacement cost. In the event of a claim, this might not cover the actual cost of replacing what has been destroyed.
- The homeowner fails to make a proper risk assessment. Statistics show that the biggest losses US homeowners typically suffer are caused by tornadoes, hailstorms, wildfires, floods, and hurricanes. Since the arrival of climate change, we are facing an increased risk of natural disasters. Since 1980, when NOAA began recording data about billion-dollar catastrophes, the United States has suffered no less than 285 of these. And 41% of them happened between 2010 and 2019. Without proper insurance cover, you will have to rely on federal aid when disaster strikes.
How Can A Homeowner Avoid Underinsurance?
Most people understand the undeniable benefits of having adequate home insurance. Yet the majority of homeowners are done with their policy once they’ve fulfilled the mortgage provider’s minimum insurance requirements. Sadly, although the bank might be happy, you could still not be adequately covered.
You can prevent this by studying your home insurance policy and making sure you know exactly what is covered and what isn’t, and what the limits and sub-limits are. Also, familiarize yourself with how e.g. a flood insurance policy could fill gaps in your main policy.
The next step is to have an in-depth conversation with your home insurance provider. Make sure you understand exactly what is covered by the standard policy and how the gaps can be filled. Also make sure he or she knows all the important facts about your home, for example, that it is more than 110 years old or situated on the Gulf Coast. Your premium might be a bit higher, but having proper coverage for your particular set of circumstances will typically save you money at the end of the day.