Facts and Due Diligence to Adequately Protect Your Home

Casualty and Theft Losses, Coinsurance Clause, Contents, and Umbrella Insurance

#1. Casualty and theft losses. In planning your home insurance coverage, keep in mind that you cannot deduct the first $100 of each casualty and theft loss. In addition, casualty losses equal to the first 10% of your adjusted gross income (AGI) are not tax deductible.

Example: If you have a $10,000 casualty loss and your adjusted gross income is $70,000, you can deduct only $2,900; $7,100 is not tax deductible ($70,000 times10% equals $7,000 plus $100 deductible equals $7,100). If you have multiple losses in any one year, the $100 applies to each loss, but the losses can be combined for the10% of AGI test.

#2. Coinsurance clause. Some homeowner contracts today have coinsurance requirements that provide full loss protection only if the policyholder increases the coverage as the value of the insured property increases. But many homeowners neglect to do this.

What to do: Most companies offer a guaranteed (extended) replacement cost endorsement. This modification of the policy not only eliminates the coinsurance provision, but also guarantees that, even if the cost to rebuild the property is more than your policy limit, the higher amount, usually up to a maximum of 125% of the policy’s limit, will be paid. Talk to your agent about adding this provision to your policy and at what additional cost. Without this provision, your insurance payment to replace your home is limited by the policy’s dollar limit. Any excess replacement cost over that policy limit is your responsibility.

#3. Other protection: Check, add, and update contents insurance for the replacement value of your home furnishings, collectibles, and personal belongings. Also discuss with your insurance broker umbrella insurance to protect you against personal lawsuits and judgments in excess of your existing property and casualty policies.

Relevant Resource:
Resource Report #31: Your Home: Mortgages, Refinancings, Ownership, Sale, Insurance, and Taxation