If your home burned down tomorrow, chances are good you wouldn’t get enough money from your insurance company to replace it. A whopping two out of every three homes nationwide are under-insured.

We’re not talking small amounts, either. The latest survey showed the typical homeowner was underinsured by 27%. That's an improvement from a couple of years ago, when 73% of homes were underinsured by an average of 35%, but still shows most homeowners are at risk.

Remodeling, stingier policies take toll

These figures aren’t news to the insurance industry, which has known for years that most of their customers weren’t buying enough coverage.

Several factors are at work:

Insurance policies cover less than in the past. In the past five years, the vast majority of insurers have done away with, or radically modified, their guaranteed replacement policies. Whereas once your company would rebuild your home no matter the cost, today most insurers cap how much they pay to 120% of your policy’s stated coverage amount.

Construction costs are on the rise. The cost of rebuilding a home has risen about 3% a year on average for the past decade. Many homeowners haven’t updated their coverage to reflect those costs.

Homeowners are remodeling like crazy. Americans spent $180 billion in 2003 updating their homes, often boosting the value of their homes in the process. An estimated 75% of remodelers fail to update their insurance coverage to reflect those improvements. Most people don’t think when they remodel their home to tell their insurer. When you think of all the money that’s going into houses that doesn’t get picked up (by policy coverage increases), you begin to see the problem.

Homeowners consistently shortchange themselves when it comes to getting enough coverage. Homeowners have more at stake now, however, because so many insurers have capped their replacement coverage.

The insurance industry isn’t rushing to fix the problem, either. Consumers are already sensitive about rising homeowners’ premiums, and few agents want to risk losing a customer by suggesting they pay even more.

The best insurers, ask their customers numerous, detailed questions about the features of their homes to determine how much coverage they should have. Others rely on less effective methods, such as multiplying the home’s square footage by average construction costs in the area.

The problem with using average construction costs, is that your home could cost much more to rebuild.

A basic home with regular carpet, two bathrooms and no fireplace is going to cost a lot less (to rebuild) than a home with two fireplaces, a three-car garage and hardwood floors. And the trend has been to update and improve everything, not only in new houses but in existing stock.

People have to take the responsibility on themselves of monitoring their coverage and making sure they have enough. One shouldn't rely on one person (your agent) who may or may not know what your needs are.

One should consult with a qualified insurance professional prior to implementing any insurance strategies.

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