Home Insurance And Renovations: What You Need To Know

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Home improvement projects with a high return on investment (ROI) are a win-win. Not only do you get to enjoy an upgrade on your home, like a new deck or remodeled kitchen, but you also get to recoup much of the costs when you sell it.

But one lesser-known drawback to home renovation projects is the subsequent need for more homeowners insurance coverage. Here's when a home project could make your homeowners insurance premiums go up and when it could actually have the opposite effect.

How Do Home Renovations Impact Homeowners Insurance?

When you buy a house, you’re required to purchase homeowners insurance to protect the property from fire, tropical storms and other natural disaster damages. The amount of coverage you need to buy depends on how much it would cost to replace or repair the home. The more coverage you have, the more expensive your monthly premiums will be.

If you complete a remodeling or improvement project that increases the total replacement or repair cost for the house, you’ll have to upgrade your home insurance policy. If you neglected to do this and then experienced a major catastrophe, the insurance provider wouldn’t pay enough money to cover the repair costs. You would then have to pay for the difference out of pocket.

On the other hand, if you finish a project that reduces the odds of a fire, flood or burglary, your premiums may drop because the risk is lower. To find out how a project will affect your monthly premiums, contact your insurance agent. They can explain what kind of impact your renovations might have.

Home Improvements That Increase Your Insurance Costs

Here are the most common projects that will boost your homeowners insurance premiums.

Adding A Pool

Constructing a pool adds more liability to your home because there’s a higher risk of medical and legal expenses from an accident. Even adding a small hot tub can increase your homeowners coverage since it also affects the chances of a mishap occurring on the property.

To compensate, you can either add more liability coverage to your current homeowners insurance or purchase a separate liability policy from the same or a different insurance company. Some providers may ask you to build a fence or add a lockable cover to help prevent accidents, which could slightly reduce your rate.

Starting A Business In Your Home

During the COVID-19 pandemic, millions of Americans started working from home and many will keep working there even when it’s safe to return to the office. For professionals who invite other people into their homes, like fitness instructors or massage therapists, adding office space could require additional coverage.

If you work with people directly in your home, you may need to purchase add-on personal liability coverage in case of an accident. Your homeowners policy only covers family members and guests, not customers or co-workers. If a customer falls down the stairs, a businessowners policy will protect you if they sue.

Most homeowners policies also have coverage limits for a business’s property. That means you might need to increase your personal property coverage, if you have any expensive machinery or inventory stored in your home.

Adding More Space

Adding another bedroom or finishing an attic can yield hundreds of feet in extra square footage, but it also increases the value of your home. A finished basement, extra bedroom, new deck or completed attic is more expensive to replace, which means you’ll need to upgrade your homeowners coverage.

Homeowners should purchase extra coverage as soon as they start building a new addition, even if the project takes months to complete. If an accident happens that affects the remodel, you won’t be able to file a claim on the new area if you don’t have coverage for it.

Luxury Remodeling Projects

When you redo a kitchen or bathroom, it’s usually not necessary to increase your homeowners coverage. If a pipe bursts and ruins your renovated kitchen floors, your insurance will pay for new floors if the replacement cost is similar to the original flooring. However, if you used high-end building materials during a major renovation, then you may need to increase your dwelling coverage.

For instance, let’s say you used custom tile made in Italy during a DIY kitchen upgrade, then the replacement cost is more than what your home insurance company initially calculated when you purchased the policy.

In this case, they’ll only pay to restore the floors back to the original quality, and you’ll have to pay for the difference out of pocket, which could end up being thousands of dollars. That’s why you should make sure to contact the insurance company when you finish a remodel to see if you need to increase your coverage.

Adding Solar Panels

While adding solar panels can reduce your monthly electric bill, they may increase your monthly homeowners premiums. Repairing damage to solar panels can be expensive. You don’t need to purchase separate insurance specifically for the solar panels, but your insurance company does need to add them to your policy.

Home Improvements That Lower Your Insurance Costs

Not all renovations require an increase in coverage. These home improvement tasks will actually decrease your homeowners insurance premiums.

Adding A Security System

According to SafeWise, making your home safer will reduce the possibility of burglary, allowing you to save up to 20% on premiums. This reduction depends on whether you add a traditional security system or a modern, app-based option with self-monitoring. In some cases, you can only receive a discount if the system includes professional monitoring.

To get the discount, send a copy of the security system installation or proof of your monitoring service to your insurance company.

Updating Your Electrical

Many homeowners are familiar with knob and tube wiring, an outdated electrical system that’s still found in many historical homes built before the 1940s. This type of wiring can contribute to electrical fires, so replacing it with a modern system can reduce the insurance premiums.

In some cases, insurance companies won't even sell coverage if the home has knob and tube wiring in poor condition. If you run into this problem, you may need to find an electrician who can upgrade your home’s wiring before purchasing a standard homeowners insurance policy.

Installing A New HVAC Unit

An outdated or antiquated HVAC or furnace can lead to electrical problems that can cause a house fire. Contact your insurance company when you replace the furnace or HVAC to see if you qualify for a discount.

Replacing Your Roof

An old roof is prone to leaks, which can cause damage throughout the rest of your home. Replacing or repairing your leaky roof can minimize that damage, which will reduce the amount the insurance company shells out in the event of a major storm.

If you recently replaced your roof, you may be eligible for a discount on homeowners insurance. Call the company and ask if this applies to you.

Establishing Wind Or Hail Resistant Features

Features that reduce the likelihood of roof or siding damage during a storm can also lower your homeowners insurance premiums. This includes adding new windows that are less likely to leak, fixing holes in the siding, adding hurricane straps to the roof, using impact-resistant shingles and replacing a garage door with a metal one.

Adding Smart Home Devices

Smart home devices, like thermostats, lights, locks and detectors, are some of the most popular products for tech-savvy homeowners. While most know that they can provide hundreds in savings on utility bills, they can also save money when it comes to homeowners insurance.

Water shutoff devices can detect when a leak has sprung and shut off the water valve, preventing major flooding. Sump pumps with alarms or back-up systems can also offer additional protection and savings. If you have any of these devices, reach out to your insurance agent to ask about possible discounts.

Do You Need Additional Home Insurance If You Hire A Contractor?

A common question many homeowners face when renovating their house is whether they need to purchase additional liability insurance if they’re going to hire a general contractor. This requirement usually depends on the type of work you’re having done.

Here are a couple coverage options you should consider:

• Renovation insurance: This type of insurance protects you if items are stolen, lost or damaged during the renovation process.
• Vacant home insurance: Some renovations may require you to find temporary living outside of your house. If this is the case, you might want to consider vacant home insurance to protect against any damage that could happen while you’re away.

Talk to your insurance agent to get their recommendation on which policies you should have.

Should Your Contractor Have Insurance?

When hiring a contractor, you’ll need to make sure they have their own insurance. This requirement is even more important if you don’t plan on purchasing additional coverage yourself. Otherwise, you could end up paying out of pocket for any accidents that occur.

For example, you find a local contractor to finish your basement, and one of their workers accidentally hurts themselves carrying heavy materials. If the contractor isn’t insured, then you might be held accountable for their injuries. But if the contractor has insurance, their provider will cover the worker’s medical costs, such as copays for doctor’s appointments and insurance deductibles.

Before your contractor begins work, ask for a copy of their Certificate of Liability Insurance. Make sure their insurance includes workers’ compensation, general liability and auto liability. This will ensure they have an appropriate amount of coverage to begin construction on your home.

The Bottom Line: Should You Increase Your Homeowners Insurance?

No one likes to spend more money than they have to, especially on insurance they might never collect on. But consider the alternative: if you don’t increase your homeowners coverage and a disaster happens, you’ll have less money than you need to cover the damages.

If the insurance company offers a steeper rate than you expected, contact a few other companies for a quote. Most homeowners can save money by bundling car and life insurance with their homeowners policy.

A final tip: if you’re still deciding how to finance your home renovation, you might want to consider a cash-out refinance. This form of financing is one of the most popular ways to fund home upgrades due to the low interest rates that typically come with it. Why not start the process to get a cash-out-refinance today?