Many homeowners unfortunately fall into the trap of not having the right amount of coverage when it comes time to file a claim. This is because there is a lot more to home insurance than just your coverage limits. While it may seem that your home is covered, you could have gaps in your policy.
How is the Value of Your Home Calculated? 
When you are looking for a home insurance policy, you will need to provide the replacement cost value of your home. This is not the same as your home’s market value. Instead, the replacement cost value of your home is how much it would take to entirely rebuild your home after a disaster, including labor and material costs. This is usually calculated using your home’s value per square foot, amenities, permanent fixtures, etc. The higher your home’s total replacement cost value, the more home insurance you should carry.
You can use an online calculated or consult an expert to calculate the total replacement cost value of your home. It’s generally recommended that you have 100% of your home’s total replacement cost value covered by insurance. If you don’t, you could fall into the 80% gap.
What is the 80% Rule in Home Insurance?
The 80% rule in home insurance refers to how much compensation you may receive depending on how much coverage you have. If you have less than 80% of your home’s total replacement cost value in insurance, you could face unexpected expenses when it comes time to file a claim.
For example, say the total replacement cost value of your home is $300,000. You purchase $180,000 in home insurance, which is 60% of your home’s total replacement cost value. A tornado sweeps in and destroys part of your home, causing $100,000 in damage. You may think all of this damage is covered since $100,000 is much less than $180,000. Unfortunately, this isn’t the case.
Since you have less than 80% of your home’s replacement value in home insurance, the insurance provider will instead calculate your compensation based on how much insurance you should have purchased and cover the distance.
In this case, you should have purchased at least $240,000 (80% of $300,000) in home insurance. The amount you actually purchased will be divided by the amount you should have purchased, which in this case is $180,000 divided by $300,000, which is 60%. This means that your insurance provider will cover 60% of the damages. If the damages to your home cost $100,000, at 60% the insurance provide will cover $60,000 of the damages. Unfortunately, this means that the remaining $40,000 will come out of your pocket.
Filing a Home Insurance Claim
When it comes time to file a claim, a claims adjuster from the insurance provider will investigate the damage to calculate how much compensation you will receive based on your policy and the incident. If the claim is approved, you will generally receive an advance before receiving the rest of the settlement. A home insurance claim can be denied, although it is rare. Denials occur because the claim is not covered by your policy, the homeowner has failed to pay insurance premiums or the claim is considered negligent or false.
Types of Compensation
There are different types of compensation you may receive, especially for coverages such as personal belongings coverage. Compensation for this type of claim may be either actual cash value or replacement cost value. Actual cash value policies provide a cash value for your lost or damage items that accounts for depreciation. For example, if you purchase a television at a market value of $1,000 and by the time it comes time to file a claim, its market value as depreciated to $500, you will receive closer to $500 for the television rather than what you paid for it. This type of policy is generally cheaper, but you may have a harder time completely replacing your belongings.
A replacement cost value policy provides enough compensation to replace your items without accounting for depreciation. So if you purchased a television for $1,000, even if its value has depreciated by the time you file a claim, you should receive close to $1,000 so you may replace the television with one of similar or identical value. This type of policy is usually more expensive, but it may allow you to easier replace your belongings after a disaster.
Keep in mind that no two homes or two home insurance policies are the same. Your insurance needs will be different than your neighbors, as will the cost of your home insurance premiums. Be sure to speak with an expert about calculating your home’s total replacement cost value and speak with your insurance agent if you have any questions about your coverage.