Understanding the 80% Rule for Homeowners Insurance

Insurance is a confusing business with multiple facets, rules and nuances. Home insurance is one necessity that has more complicated rules. When considering an insurance policy, it’s important to understand the 80% rule in home insurance. In some instances, insurance companies won’t cover the entire cost of damages caused by covered perils.

What is the 80% Rule for Home Insurance?

The 80% rule is an unwritten rule that means insurance companies won’t provide complete coverage after a disaster unless the insurance policy in effect equals at least 80% of the home’s total replacement value. This means that if your home is insured for less than 80% of its total replacement value, the insurance company may only pay the difference. Say the replacement value of your home is $300,000. You insure your home for $210,000 and a tornado sweeps in and causes $100,000 in damage. Because $210,000 is only 70% of $300,000, your insurance company may not cover the entire $100,000 worth of damage. Instead, they’ll divide the amount of coverage you purchased by 80% of the replacement cost value. So instead of paying the entire bill, your insurance company would pay $87,500 and leave you with the remaining $12,500.

What is the Difference Between Market Value and Replacement Value?

The market value of a home is not the same as a replacement value. Market value is the price that the home is worth on the current market. It concerns the selling and purchase value of the home. The replacement value of the home concerns how much it would cost to rebuild the home in case of a disaster.

Your home’s market value is determined by:

Curb appeal
Home condition
Architectural style
Size and number of rooms
Construction quality
Supply and demand of homes
Location

Your home’s replacement value is determined by:

Square footage
Value of floors, fixtures, appliances
Value of exterior and interior aspects
Value of roof
Possible labor needed to rebuild

How Much Does Home Insurance Cost?

Home insurance prices depend on the state and the types and amount of coverage. Homeowners’ insurance in Massachusetts costs around $1,073 annually. It seems like less of a price to pay when you compare it with the thousands of dollars you could owe without the right coverage. Contact an insurance agent about insuring your home at the right amount to be sure you’re covered in case of disaster.