When purchasing a home, most lenders will require you to purchase homeowners insurance, whichprotects your home against damages, both interior and exterior, including those caused by acovered event like a burglary,fireornatural disaster. Homeowners insurance can provide great peace of mind knowing you'll be able to repair or rebuild your home if an accident occurs.
However, to make sure you're not underinsured, be sure to follow the 80% rule (also called the 80/20 rule).
What is the 80% rule in homeowners insurance?
The 80% rule in home insurance dictates that in order to receive full coverage from their insurance company, homeowners must have coverage costing at least 80% of their home’s total replacement cost value. Most insurance companies adhere to the 80% rule, and you’ll want to follow it to avoid any penalties for being underinsured, as well as to ensure you have adequate coverage if something happens to your home.
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Therefore, it’s important to know your total replacement cost when deciding how much coverage to get. Total replacement cost is how much it will cost to rebuild your home using current building supplies in the event of any damage.
How do you calculate total replacement cost?
“Replacement value is typically calculated by multiplying the average local per-foot rebuilding cost by the square footage of the house,” according to Demont Insurance,
As it can be complicated to calculate this total, most insurance companies can estimate this value for you. However, here are the essential factors that go into calculating your total replacement cost, according to Horton Insurance Group.
- Square footage of your home
- Home renovations and improvements (e.g., changing flooring, appliances and fixtures; updating a roof; or installing new windows)
- Cost of replacing materials
- Labor costs in the event repairs are needed
- Value of interior and exterior components
It's important to regularly review your home's total replacement cost value and adjust your home insurance coverage as needed. For example, if you've recently made renovations or home improvements, there's a chance you'll need to adjust your coverage.
Use our tool below — powered by Bankrate — to compare home insurance rates today.
What is an example of the 80% rule in insurance?
Here’s an example illustrating the 80% rule in home insurance.
Let's say you purchase a home with a total replacement cost value of $400,000 with home insurance covering $300,000. A fire then causes $250,000 worth of damage to your home. While you may think your insurance policy will cover the total cost since the cost of damages is lower than the cost of coverage, this isn't the case.
To meet the 80% rule, if your home has a total replacement cost value of $400,000, you'd need to purchase $320,000 in coverage (80% of 400,000). If you fail to meet this rule, you won't be covered for the entirety of the damages and instead will have to pay out-of-pocket to cover a portion of the expenses.
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FAQs
The 80% rule dictates that homeowners must have replacement cost coverage worth at least 80% of their home's total replacement cost to receive full coverage from their insurance company.
How much is the deductible for most homeowners policies? ›
Home insurance deductible options will vary among insurance companies. However, most home insurance policy deductibles tend to be from $100 to $5,000. The average home insurance deductible is $1,000.
What is the 80% rule in property insurance? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What clause requires that the homeowner have insurance that is equal to 80% of the home's replacement value? ›
Coinsurance clause. A coinsurance clause is a provision that requires you to carry coverage equal to 80% of your home's value.
What does 80 percent coverage mean? ›
The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
Can I claim my home insurance deductible on my taxes? ›
The IRS considers homeowners insurance to be a non-deductible personal expense. However, there could be some situations or business purposes where you may be able to partially deduct certain expenses, like if you run a business out of your home.
Is it better to have a high or low home insurance deductible? ›
The higher the deductible you choose, the less you'll pay for your policy. For example, raising your deductible from $1,000 to $2,500 can save you almost 13% on your premium on average, according to NerdWallet's rate analysis.
Should you insure your home to its full value? ›
Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage. However, if you don't insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss.
Is replacement cost home insurance worth it? ›
Replacement cost homeowners insurance may be worth considering for the contents of your home if you want to replace older items with newer ones. Like dwelling replacement cost, contents replacement cost usually has a coverage limit maximum as defined in your home insurance policy.
What is the rule of thumb for homeowners insurance? ›
The 80 percent rule in homeowners insurance means that you must insure your home for at least 80 percent of the replacement cost for an insurer to cover the damages.
Many things that aren't covered under your standard policy typically result from neglect and a failure to properly maintain the property. Termites and insect damage, bird or rodent damage, rust, rot, mold, and general wear and tear are not covered.
Which clause is found in most homeowners insurance policies? ›
A mortgagee clause is found in many property insurance policies and provides protection for a mortgage lender if a property is damaged.
What is the difference between ho3 and ho5? ›
HO-3 policies and HO-5 policies cover the same perils. The key difference is that HO-3 policies only provide open perils coverage for structures; your personal property is insured on a named-perils basis. HO-5 policies insure both your structures and personal property on an open-perils basis.
What is the 80th percentile rule? ›
Under the rule, which was formally repealed Jan. 1, insurance companies were required to pay out-of-network providers at least the 80th percentile of the average going rate for a medical service. Without the rule, an insurance company is free to pay a lower rate for services — and consumers have to pay the difference.
What is the difference between 80% and 100% coinsurance? ›
Response 9: In the case of 100% coinsurance, if a property insurance limit is lower than the value of the insured property, a proportional penalty will be assessed after a loss. A typical 80% coinsurance clause leaves more leeway for undervaluation, and thus a lower chance of a penalty in a claim situation.
What is considered good coverage? ›
As a rough rule of thumb, auto insurance experts recommend liability coverage of at least 100/300/100 — meaning, $100,000 in body injury liability insurance per person, $300,000 in bodily injury liability per accident and $100,000 in property damage liability per accident.
Is it better to have a $500 deductible or $1000? ›
If you're more likely to get into an accident, you won't want to pay out a higher deductible. However, if you're generally a safer driver, your car insurance premiums will be lower with a $1,000 deductible.
How much of insurance premiums are deductible? ›
Generally, you are allowed to deduct health insurance rates on your taxes if you itemize your deductions, pay your health insurance premiums directly, and your medical expenses totaled more than 7.5% of your income for the year.
What is a large deductible on an insurance policy? ›
A plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share (also called your deductible).
Is 2000 a high deductible plan? ›
The higher the deductible, the more out-of-pocket costs you pay before your insurer begins covering medical expenses. The IRS defines high-deductible health plans for 2023 as: Individual plans with deductibles of at least $1,500. Family plans with deductibles of at least $3,000.
