It’s estimated that two out of every three homeowners don’t have enough home insurance coverage to fully protect their property and assets after a covered loss, according to the Insurance Information Institute.  Add to this the fact that rising inflation has caused construction costs to skyrocket, and at the very least the dwelling coverage portion of your home insurance policy could be too low.
But how can you spot other areas where you’re underinsured? And how can you figure out how much coverage you do need? We break down what it means to be underinsured and nine signs to help you spot too-low coverage limits in your policy.
What does it mean if your home is underinsured?
When your home is underinsured, you don’t have enough home insurance coverage to pay to fully repair your home or replace your belongings after a fire, tornado, hurricane, or other covered loss. This means you’ll have to pay a significant amount of money out of pocket to rebuild your home or buy new stuff.
Your home may be underinsured if you don’t have high-enough coverage limits for even just one of these five types of coverage included in standard home insurance policies:
Dwelling coverage: Need a high enough limit to fully rebuild your home from the ground up.
Other structures coverage: Need a high enough limit to fully rebuild any structures on your property not attached to your home, like fences, gazebos, decks, or guesthouses.
Personal property coverage: Need a high enough limit to cover the replacement of all of your personal belongings — both on and off your property.
Loss of use coverage: Need a high enough limit to cover all of your living expenses if you need to stay elsewhere while your home is being rebuilt after a covered loss.
Personal liability coverage: Need a high enough limit to cover all of your financial assets (i.e. homes, cars, boats, investments, crypto) if you’re sued for damages.
How do I know if my home is underinsured?
Whether you’ve made home renovations, come into a financial windfall, or seen an increase in natural disasters where you live — odds are there’s at least one area of your home insurance policy where you could stand to increase your coverage limits.
Here are a few signs your home is underinsured — and what you can do about it.
1. Inflation is on the rise — with labor and supply costs skyrocketing
While many industries have started to rebound since the start of the COVID-19 pandemic, rising supply costs mixed with labor shortages continue to plague the construction industry.
Inflation in the U.S. rose at a rate of almost 8% between February 2021 and February 2022 — the largest increase in over 40 years, according to the U.S. Bureau of Labor Statistics.  And building material prices have risen over 30% since January 2020. 
Even worse, home insurance rates are rising faster than inflation in many parts of the country. Our 2022 Home Insurance Pricing Report found that 90% of homeowners saw their quoted annual premiums increase from May 2021 to May 2022. And homeowners in Arkansas, Washington, and Colorado saw their home insurance premiums increase at more than double the rate of inflation.
So what does this mean for your home insurance rates?
It’s going to cost more money to rebuild or repair your home and other structures on your property — meaning you’ll need higher coverage limits for the dwelling and other structures sections of your home insurance policy. More coverage equals higher rates.
Consider upgrading to extended or guaranteed replacement cost coverage
Extended replacement cost coverage increases your dwelling coverage limit an extra 25% to 50% — whichever amount you choose — in the event the cost to rebuild your home exceeds your coverage limits. And guaranteed replacement cost coverage goes one step further and pays the full cost of replacing your home after a covered loss regardless of whether the amount exceeds your policy limits.
With construction prices on the rise, upgrading to one of these coverages may be well worth the added premium so you’re not left covering the gap out of pocket should disaster strike.
2. You picked the bare minimum coverage limits across the board
If you were trying to cut costs when you first purchased your home insurance policy, you might have opted for bare bones coverage just to satisfy your mortgage lender’s requirements. That’s because the lower your coverage limits, the cheaper your policy.
But if you’re now in a better place financially to increase your coverage limits, it’s probably a good idea to.
Say you only have $100,000 in dwelling coverage and $50,000 in property damage coverage. But it’ll cost $300,000 to rebuild your home completely and another $150,000 to replace all of your stuff. This leaves you with a $300,000 gap in coverage that you’d need to pick up the slack with out of your own pocket.
Odds are you don’t have a couple hundred thousand dollars just lying around. To protect yourself financially, you’ll want to increase your coverage limits so you don’t find yourself in a place where you’re having to choose between cashing out your 401(k) or rebuilding your home.
3. You made home renovations and never updated your policy
Whether you replaced your roof, revamped your kitchen, or finally upgraded your ‘80s linoleum to hardwood floors, making any home renovations increases the replacement cost of your home. This in turn should lead you to increase the coverage limits in your home insurance policy.
The replacement cost of your home is how much it would cost to rebuild from the ground up at today’s construction prices. The dwelling coverage limit of your home insurance policy should equal the replacement cost of your home. And if any home renovations included upgraded furniture or appliances, you’ll also want to increase the personal property portion of your home insurance policy to factor in their increased value.
4. You never made a home inventory or it’s not updated
Creating a home inventory — a list of all of the personal belongings in your home along with their value — is the easiest way to ensure you have enough personal property coverage.
If you never created a home inventory or haven’t updated it in a couple of years, then you could be underinsured when it comes time to replace your belongings after a covered loss.
Actual cash value vs. replacement cost coverage
When choosing your personal property coverage limits, you’ll also want to consider whether your belongings are covered on an actual cash value or replacement cost basis.
Here’s how the two types of coverage differ:
Actual cash value: Pays to replace your property at its replacement value minus depreciation. This means the cost of wear and tear is subtracted from the claim reimbursement.
Replacement cost: Pays to replace your property with items of similar value at today’s prices.
Standard home insurance policies default to actual cash value coverage for your personal property since it’s less expensive. If you just moved into your home and your belongings are relatively new, then actual cash value personal property coverage is probably fine.
But if your belongings are 10+ years old, you might want to upgrade to replacement cost coverage to ensure you receive a claim settlement check that’s high enough to replace your belongings with new stuff.
5. You don’t have any endorsements or add-ons on your policy
Standard home insurance policies cover your home from 16 named perils or hazards, including wind, hail, snow, fire, lightning, theft, and vandalism. However, you can purchase coverage add-ons — called endorsements — to protect your home from even more hazards.
If you don’t currently have any endorsements on your home insurance policy, you may be underinsured. A few popular coverage add-ons you might want to consider purchasing include:
Water backup coverage: Protects your home and belongings from water damage caused by backed up drains, sewage systems, and sump pumps. You can usually add it to your policy for an extra $30 to $70 per year.
Equipment breakdown coverage: Covers a variety of appliances in your home — including your washer and dryer, AC and heating system, refrigerator and oven, and more — in case they break down due to mechanical or electrical failure. You can usually add it to your policy for an extra $25 to $50 annually.
Scheduled personal property coverage: Extends the coverage for high-value items like jewelry, fine art, and electronics that are subject to lower limits in standard home insurance policies. You can expect to pay around $100 for each $10,000 in scheduled coverage for a specific category of items.
6. You have exclusions on your policy
Home insurance exclusions are areas of coverage that your home insurance policy doesn’t include.
For example, if you own a dog that your insurer considers a “dangerous breed,” it might exclude liability coverage if your dog bites someone on your property. Or if you live in an area at high risk of windstorms, your insurance company might exclude coverage for wind and hail damage.
If you have any exclusions on your policy, you may be underinsured. But most insurers offer additional policies you can purchase to ensure your home, belongings, and liability are fully protected.
In the examples above, you could take out a pet liability insurance policy that covers all dog breeds for most kinds of injuries or damage. Or you could buy a separate wind-only policy that covers your home and belongings from damage caused by wind and hail.
7. You inherited money or otherwise increased your financial assets
Whether you received a financial windfall or had a good year on the stock market, any increase in your financial assets should trigger an increase in the liability coverage of your home insurance policy. If not, you could be underinsured.
The personal liability portion of your home insurance policy protects all of your assets — not just your home — in case someone is injured or their property is damaged while at your home and you’re found legally responsible and sued for damages. If your liability limits are too low, they could come after your assets in the event of a lawsuit.
8. Your home was recently designated to be in a high-risk zone
With rising sea levels, worsening droughts, and record-breaking heat, a home that was never considered high risk 20 years ago could now be sitting smack dab in the middle of a flood or wildfire zone. And if you haven’t taken in this added risk of damage due to climate change, your home could be underinsured.
Standard home insurance policies don’t cover damage to your home or personal belongings caused by flooding. You’ll need to purchase a separate flood insurance policy for that.
And if your home is now in an area prone to brush fires, your home insurance policy might exclude damage caused by wildfires. In this case, you’ll need to purchase a separate wildfire insurance policy.
You can find out if your home is located in a high-risk flood zone by using FEMA’s flood map tool. And you can track your home’s risk of wildfire damage by using the USDA’s wildfire risk to communities tool. If you discover you live in an area at high risk for either, you might want to revisit your home insurance coverage.
9. You’ve seen an increase in extreme weather where you live
With an increase in hurricanes, tornadoes, and snowstorms over the last few years, there’s no denying climate change poses a real threat to homeowners. If you haven’t updated your home insurance policy to account for these added risks of damage, your home could be underinsured.
Whether your home is seeing more frequent thunderstorms or tornadoes, it might be time to increase the dwelling and personal property coverage limits on your home insurance policy to ensure you’re fully protected should disaster strike.
5 steps to take if your home is underinsured
So you’ve identified a few areas where you’d like to increase your coverage limits on your home insurance policy. What’s next?
Our licensed home insurance experts at Policygenius can help you update your policy or even switch to another company that’s better priced or offers the type of coverage you’re looking for. Follow these steps to get started.
Contact your current insurance company. Let them know which coverage limits you’d like to increase or any endorsements you’d like to add to your policy and ask for a quote. This will allow you to compare prices from other insurers to find the best home insurance company for you.
Reach out to a Policygenius expert. Next, click the Start calculator button below to answer a few questions about yourself, your home, and the coverage you’re looking for. They’ll help you shop around for home insurance to ensure you’re with a company that offers the most bang for your buck.
Talk over your coverage needs. A Policygenius expert will reach out to walk you through your current policy, areas where you may be underinsured, and additional coverages you may want to consider.
Compare quotes from a few insurers. You’ll then be sent a few quotes to look through based on your new-and-improved coverage limits. Weigh these quotes against your current insurance company’s quote to decide if you want to make a switch.
Update your current policy or switch to a new insurer. If you decide to stick with your current company, your insurance agent will help you update your policy to ensure you’re fully protected. Or if you decide to switch home insurance companies, a Policygenius agent will fill out all of the paperwork for you so that all you have to do is sign the dotted lines and pay your first premium. We’ll even cancel your old policy for you — for free.
How do you know if your home is overinsured?
Your home may be overinsured if your dwelling coverage limits are higher than the replacement cost of your home or your personal property coverage limits are higher than the actual value of the belongings you own.
One of the most common reasons homeowners are overinsured is because they set their dwelling coverage limits to be equal to their home’s market value — or how much they’d pay for their home in the current real estate market. This is not how you should determine your home’s dwelling coverage limits.
Say there was a bidding war on your home due to the hot real estate market. While the rebuild cost of your home is $400,000, you ended up paying nearly $600,000 to beat out other potential buyers.
You’d still only need $400,000 in dwelling property coverage to fully protect your home — even though you paid nearly $200,000 more than that when you bought it. If you insured your home for $600,000, you’d definitely be overinsured.
Frequently asked questions
What if I don’t have enough home insurance when I file a claim?
If your home insurance coverage limits are lower than the cost to repair or replace your home or belongings after a covered loss, you’ll have to pay for any remaining costs out of your own pocket. If you don’t have the money to cover that gap in coverage, then you’ll likely have to downsize and move elsewhere.
What happens if I overinsure my home?
If you overinsure your home, you’re essentially paying for more coverage than your home and belongings are worth. To put it simply: You’re wasting money. You should try to get your coverage limits to as close as possible to the value of your home and belongings.
Is it better to be overinsured or underinsured?
Neither — you should have the amount of home insurance that’s just right for your needs. Underinsuring your home means you’ll be left to cover the cost to rebuild your home and replace your belongings out of your own pocket to make up for your low claim settlement check. And overinsuring your home means you’re throwing away money since your coverage limits are too high to ever fully take advantage of them.