What is the 80% rule in homeowners insurance? As a homeowner, protecting your home and personal belongings is very important and this is where homeowners insurance steps in. It offers financial protection against unforeseen events like natural disasters, fire, and theft.
However, it can be complicated when exploring the details of insurance quotes, especially when trying to understand how financial protections and coverage limits work.
One of the essential concepts that you need to know about is the 80% rule in terms of homeowners insurance. But what exactly is this 80% Rule, and how does it affect my insurance coverage? This is the guide that will entail everything you need and want to know about this rule.
Whether you are looking to re-evaluate your current home insurance coverage or you are a new owner, the financial security of your home lies in the understanding of this principle.
What is the 80% Rule in Homeowners Insurance?
In homeowners insurance, the 80% rule is also recognized as the Co-Insurance clause. It requires you to cover at least 80% of your home replacement cost to get the whole amount of a claim for a covered peril or loss. Moreover, the replacement cost is the amount required to rebuild your home not from the purchase price, or market value but from scratch. In other words, this is an important rule that helps you know how much you can get back if your property suffers a covered loss when you file a claim.
How Does It Work?
The 80% rule in homeowners insurance requires the policyholder or the homeowner to pay at least 80% of the replacement cost of your home to prevent penalties or charges on your claims. Therefore, if you are eligible, you can get the full claim amount for a covered loss. However, if you are underinsured, you will only be compensated partially based on the ratio of your coverage to the 80% minimum. Hence, you can be financially protected against huge damages.
What is an example of the 80% Rule in Insurance?
To understand the 80% rule and the concept behind it, here is an example illustrating the rule in home insurance.
For instance, let us say you buy a home whose total replacement cost value is $400,000 and the insurance coverage is $300,000. Then, a fire breaks out and causes damage which costs $250,000 to repair. While you think that your insurance quote will be liable for the whole cost since the cost of coverage is higher than the cost of damages. However, that is not the case.
Instead, if you want to meet the 80% rule, if your home has $400,000 as its total replacement cost value, you will need to buy 80% of 400,000 which is $320,000. However, if you do not meet this rule, you will not be compensated or reimbursed for the whole damages. On the contrary, you will be liable for the out-of-pocket cost to cover a part of the total expenses.
How Is Total Replacement Cost Calculated?
This is one of the frequently asked questions that many homeowners are curious to know. So, to calculate the total replacement cost of your home, you will have to multiply the total square footage of your home. This is by the local cost per square root for construction. Factors like the current building codes, labor costs, quality of materials, and home features will be considered. Besides, you can choose to use the assessment of an insurance company, a professional appraisal, or online estimator tools to find out this amount.
Here is a summary of how to calculate the total replacement cost of your home:
- Measure or get the total area of your home in square feet.
- Research the cost of local construction.
- Multiple the square footage of your home to find the basic replacement cost.
- Make adjustments for home codes and features.
For Example:
If your home is 2,000 square feet, and the local construction cost is $150 per square foot, your total replacement cost will be:
2,000 sq ft x $150/sq ft = $300,000
Frequently Asked Questions
What happens if I don’t meet the 80% Rule?
If you are not able to meet the 80% rule, you might have to get a co-insurance penalty. This can be done when you file a claim on your insurance. Therefore, you will only be compensated for a part of the loss based on the amount of coverage you have. This is compared to the required 80% of the home’s replacement cost.
Can I adjust my Homeowners insurance to meet the 80% Rule?
Certainly, policyholders can make changes to their homeowners’ insurance policy to meet the 80% rule. This is possible by increasing your coverage limits. Hence, reach out to your home insurance company to update your quote. Also, make sure that it covers at least 80% of your home replacement cost.
