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Do You Know the 80/20 Rule in Homeowners Insurance?

Photo of author, Joe Spangler.
Joe Spangler
Client Coordinator

As the Federal Reserve continues their fight to drive inflation down to their 2% goal, it's a good time to remind everyone that inflation affects far more than the cost of the everyday goods and services we routinely purchase. One area that you may not readily associate with inflation is the total cost (including labor and materials) of rebuilding or repairing your home to its pre-loss condition following an unexpected event, such as fire, theft, or natural disasters.

The 80/20 Rule

Have you heard of the 80/20 Rule? In short, the 80% Rule is an insurance industry standard that stipulates policyholders must carry enough homeowners insurance to cover at least 80% of their home’s replacement cost. When the Rule is met, insurance companies “typically” cover the full cost of repairs or replacement without applying an underinsurance penalty to the policyholder.

However, if a policyholder’s coverage falls below 80% of the home's replacement cost, the policyholder becomes a co-insurer in their loss. That means the insurer may only pay a percentage of the claim, leaving the policyholder responsible for the uncovered costs. Of course, these costs could be financially burdensome for the homeowner, especially when dealing with significant damage or a complete loss of the property.

What Is the Right Insurance Amount?

While the 80/20 Rule is the industry standard, it's important to remember that every homeowner's situation is unique. Factors such as inflation, home state, climate, and recent home renovations that increased the overall value of your home should all be considered when determining your appropriate insurance coverage amount. As a result, it may be prudent for some homeowners to carry additional coverage beyond the 80% threshold for added protection.

To calculate the proper coverage amount, homeowners must first determine the current replacement cost of their home. This can be done by consulting with a licensed appraiser or utilizing online tools provided by insurance companies. Once the replacement cost is determined, multiply it by 0.80 (or 80%) to obtain the minimum coverage amount needed.

Education and Preparation

Homeowners insurance is designed to protect you from the unexpected and provide peace of mind. But sometimes people buy a policy and then forget about it, until it's too late. We encourage you to educate yourself, conduct annual reviews of your insurance policies, and speak with your insurance professional when questions arise.

At McKinley Carter, we know insurance is an integral part of your overall financial strategy. Although we are not licensed insurance agents, our team can point you in the right direction should you have concerns.

Only by confirming your adherence to the 80% Rule can you fully protect your most significant asset and, thus, secure a brighter, worry-free future.

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