Take This Suze Orman Warning About Homeowners Insurance Mistakes to Heart

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  • Suze Orman has issued a warning about why many homeowners may have too little coverage.
  • It's important to put the right protection in place.
  • Buying extended replacement value could be necessary during times of high inflation.

These errors could be costly ones.

For most people who own their own property, their home is their most valuable asset. That's why it's so important to have the right home insurance coverage in order to provide sufficient protection for their house.

Unfortunately, finance expert Suze Orman has recently warned that many people may not have the appropriate amount of homeowners insurance -- especially during these current economic times when inflation has surged.

Here's why Orman believes many people are making major insurance mistakes and could be left without the coverage they need.

Do homeowners have the right kind of insurance?

As inflation has hit recent records in 2022, Orman issued a warning in March about how rising costs could affect homeowners insurance coverage.

As she explained on her blog, there are different kinds of homeowners insurance, including actual cash value, replacement value, and extended replacement value. Extended replacement value coverage is the most expensive, but Orman believes it is the right choice for many homeowners in light of rising material and labor prices.

In fact, she explained that those who opted for either actual cash value or replacement coverage could find themselves facing serious risks of uncompensated losses in the event that major losses occur and a property needs to be rebuilt.

Why Orman believes that extended replacement value policies are the best choice

According to Orman, actual cash value policies can be tempting because of the low premiums, but this kind of insurance has a major problem. Insurers only cover the depreciated value of lost or damaged property. That's the current market value -- which is likely low with older items. She gives the example of a 10-year-old roof that's destroyed. The insurer would provide payment equal to the reduced value of a 10-year old roof, which wouldn't be enough to put a new roof on the home.

Replacement value coverage can also be a problem, too, according to Orman. This type of coverage is better than actual cash value because it pays to replace the lost or damaged items on the home. But it offers coverage only up to the dwelling limit coverage, which is the stated value the home is insured for.

"That may not be enough to rebuild and replace if prices for materials and labor have risen," Orman says on her blog.

Extended value policies might be the answer

Extended value policies, on the other hand, may allow an insurer to cover costs that are higher than the replacement value -- sometimes as much as 120% higher. If the price of goods and services has risen dramatically and it would cost a lot more than expected to rebuild a home, this coverage could be a "financial lifesaver," according to Orman.

This type of protection isn't available from every home insurer, but Orman believes it is so important to get extended value coverage in place that she "wouldn't blindly stick with one insurer if it doesn't offer extended replacement value."

Ultimately, every homeowner needs to weigh the risk they are willing to take on, as extended value coverage will definitely be more expensive. But heeding Orman's advice could be a smart choice for homeowners who want to be absolutely sure they can rebuild their home to its current standard without facing surprise out-of-pocket expenses as prices rise.

Our picks for best homeowners insurance companies

There are many homeowners insurance companies to choose from. We’ve researched dozens of options and short-listed our favorites here. Looking for a green build discount or easy bundle policies? Want an easy-to-use interface? Read our free expert review and get a quote today.

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