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
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 is the 80% rule in homeowners insurance? ›
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.
What is 80 of the insurable value? ›
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.
What does 80% coinsurance mean for homeowners? ›
Coinsurance is a property policy requirement that means you must insure your home or office to a specific value, often 80% of its replacement cost at the time of the loss.
What is the 80/20 rule in insurance? ›
The 80/20 Rule generally requires insurance companies to spend at least 80% of the money they take in from premiums on health care costs and quality improvement activities. The other 20% can go to administrative, overhead, and marketing costs.
What does 80% mean on insurance? ›
Simply put, 80/20 coinsurance means your insurance company pays 80% of the total bill, and you pay the other 20%. Remember, this applies after you've paid your deductible.
What is the 80 percent rule? ›
The 80% rule was created to help companies determine if they have been unwittingly discriminatory in their hiring process. The rule states that companies should be hiring protected groups at a rate that is at least 80% of that of white men.
How do you calculate 80 percent discount? ›
The procedure to calculate the percentage off for the product is given as follows:
- Subtract the sales price form the original price.
- Divide the discount price by the original price.
- Finally, multiply the solution by 100.
Note that insuring your home for 80% of its replacement value is a general guideline. Some insurance companies may require higher percentages and/or have built-in features to account for increased replacement costs due to inflation.
How to calculate insurable value of property? ›
A total insurable value (TIV) is calculated by adding together the total physical property, equipment, inventory, tools, etc. at each location and combining it with the final number calculated on a fully completed business income worksheet.
The coinsurance formula is the homeowner's insurance formula that determines the amount of reimbursem*nt that a homeowner will receive from a claim. The coinsurance formula becomes effective when a homeowner fails to maintain coverage of at least 80% of the home's replacement value.
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.
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.
What is the 80% rule in property insurance? ›
The 80% rule describes a policy in which insurers only cover the costs of damage to your house or property if you've purchased coverage that equals at least 80% of the property's total replacement value.
What is the best explanation of the 80-20 rule? ›
The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. In other words, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which initiatives to prioritize so you can make the most impact.
What is the 80% average clause? ›
Most policies allow a sum insured that is within 80% of the replacement value without the clause coming into effect. If the sum insured is below the 80% then it is deemed the policy holder is under insuring and 'average' is applied.
How does 80 20 insurance work with deductible? ›
You have an “80/20” plan. That means your insurance company pays for 80 percent of your costs after you've met your deductible. You pay for 20 percent. Coinsurance is different and separate from any copayment.
Is 80/20 insurance good? ›
Is 80/20 Insurance Right for You? In the end, 80/20 insurance offers a lot of coverage but still does require a significant financial commitment from the policyholder. The choice of purchasing an 80/20 insurance policy all really comes down to what you can afford and what your medical needs are.
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.
