Since home insurance isn’t generally required by state or federal law, many homeowners may consider dropping their coverage once the option is available. However, this isn’t always the best choice, nor is it recommended.
In general, your home insurance coverage is usually only required by a lender if you have a mortgage on your home. A lender will typically require you to carry enough home insurance to cover the cost of your mortgage. This means that once the home is paid off, the requirement may disappear and leave you with the option to drop your home insurance coverage.
The reason this is not recommended is that if you do not have coverage, you will be responsible for any damages to your home out of pocket.
Can I Lower My Home Insurance Coverage?
Without a requirement for how much home insurance you need, you have the option to lower your coverage. This could save you money, but it could also leave gaps in your policy due to the 80% rule in home insurance.
In home insurance, the 80% rule states that you should carry at least 80% of your home’s total replacement cost value in home insurance. The total replacement cost value is different than your mortgage. Instead, it is how much it would cost to completely rebuild your home after a disaster, including building and material costs. Carrying less than 80% of this cost can leave gaps in your coverage, meaning you will have to pay for the remaining costs out of pocket.
Speak with your insurance agent before making changes to your home insurance policy. You may be able to cut additional coverage while keeping the key protection offered under basic home insurance such as:
- Dwelling Coverage: Dwelling coverage provides compensation for damages to your physical home caused by fire, wind, hail, lightning, smoke, theft, vandalism and more.
- Personal Belongings Coverage: Personal belongings coverage provides compensation for damages to your personal items caused by fire, smoke, theft, vandalism and more.
- Liability: Liability insurance covers accidents within your home where another person is injured, or their property is damaged.
- Additional Living Expenses: Additional living expense coverage (ALE) covers expenses related to temporarily moving while the home is being repaired or rebuilt after a disaster.
Speak with your insurance agent about your home insurance needs both before and after you have paid off your mortgage.
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