Homeowners who have mortgages are generally required to carry insurance on their residences, but a mortgage lender’s insurance requirements often only cover their loan. A lender’s required coverage won’t necessarily protect your equity, your belongings, or yourself.
You can easily purchase these additional protections through any standard homeowner’s insurance policy. Here are the details that Dave Ramsey recommends when customizing your policy’s coverage.
Deductibles: $1,000 for All Coverages
A deductible is the amount that you pay before your homeowners insurance begins paying on a covered claim.
As an example, assume wind caused $10,000 in damage to your roof. If you have a $1,000 deductible, you’ll pay the first $1,000 for repairs and the insurer will pay the next $9,000.
What deductible you choose directly affects both your risk exposure and your premiums. Higher deductibles equate to more risk but lower premiums, and lower deductibles bring less risk but higher (sometimes much higher) premiums.
Dave Ramsey recommends setting your homeowners insurance deductible to $1,000. This is the same amount as his recommended $1,000 emergency fund, so you should be able to cover the cost of a deductible if you have a basic emergency fund in place.
For most homeowners, a $1,000 deductible also is a good combination of acceptable risk and affordable premiums. This applies to all coverages within your policy, but especially dwelling coverage that insures your home itself.
Home Warranty: Skip and Build Your Emergency Fund
Home warranties protect against repairs, which are usually less expensive than the damage that proper homeowners insurance covers. Dave Ramsey recommends skipping any home warranty for a couple of reasons.
First, the typical home warranty costs $450 annually, and only 25% of premiums are paid to homeowners. The company providing the warranty keeps most premiums as revenue and profit.
Additionally, many repairs that would be covered by a home warranty will be less than $1,000, which your emergency fund should be able to cover. Dave Ramsey recommends putting any premium you’d pay for a home warranty toward your emergency fund.
Coverage Type: Guaranteed Replacement Cost
The purpose of homeowners insurance is primarily to ensure that you can afford to replace your home if it’s damaged or destroyed. In order to make sure you can replace your home in its entirety, Dave Ramsey recommends guaranteed replacement cost coverage.
Guaranteed replacement cost coverage provides the highest level of protection for your home, but this isn’t a coverage you want to skimp on. The cost of rebuilding can be tens of thousands more than your loan balance or even your home’s value (including equity). Material and labor costs generally increase with time, and they can jump quickly if many homes in a geographic area are destroyed.
Regardless of your policy limits, guaranteed replacement cost coverage will pay the entire cost (less deductible) of rebuilding your home. It will cover the full cost even if material and labor rates rise.
The availability of guaranteed replacement cost coverage varies by state and insurance company. If it’s available to you, though, Dave Ramsey recommends it.
You can explore more information about what Dave recommends for term life insurance, IDT theft protection, auto insurance, and disability insurance.
