What Is Contents Insurance and How Does It Work?

Contents insurance is the portion of a home insurance policy that helps pay to repair or replace your personal belongings when they’re damaged or stolen in a covered event. For example, if a fire damages your furniture, contents insurance will generally help pay to replace the affected items.

Understanding the ins and outs of contents insurance is key to selecting the right coverage for you. Here’s a closer look at what contents insurance is, how it works, and who needs it.

What is contents insurance?

Contents insurance, also known as personal property coverage, offers protection for your personal belongings if they’re damaged or lost due to covered perils, such as theft and fire. Contents insurance may also protect belongings outside your home, such as items left in your car.

Contents insurance is usually part of a standard homeowners insurance or renters insurance policy. It’s generally not available as a stand-alone policy.

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What contents insurance covers

Contents insurance typically applies when your possessions are stolen or destroyed by fire, weather, or other insured disasters.^[1] For example, if a fire destroys your furniture or someone steals your TV and laptop from your home, contents insurance will generally help cover the replacement costs.

What contents insurance doesn’t cover

Though contents insurance protects your personal belongings from various perils, it has some exclusions. For example, contents insurance won’t cover items that are damaged due to normal wear and tear, such as replacing an old roof or appliance.

Accidental damage is also generally not covered by contents insurance. For example, if you stain your couch or spill a drink on your computer, contents insurance likely won’t cover the damaged items.

However, you might be able to purchase coverage for accidental damage as an optional add-on.

What are contents insurance coverage limits?

Coverage limits for contents insurance policies are usually 50% to 70% of the dwelling coverage in your homeowners policy. For example, if your dwelling coverage is $250,000, then your contents insurance would be between $125,000 and $175,000.

Your contents insurance coverage limit is the amount your insurance company will pay toward a covered claim. For example, let’s say your contents insurance has a $125,000 coverage limit and you lose your possessions in a house fire. If it’ll cost $150,000 to replace everything, your contents insurance will cover $125,000, leaving a $25,000 gap.

How much contents insurance coverage do you need?

One of the best ways to determine how much contents insurance you need is to take an inventory of your personal possessions. Creating a home inventory involves making a list of the items you own and keeping receipts, purchase contracts, and appraisals for proof of value.^[2]

Another tool to help determine how much insurance you need is the 80/20 rule. The 80/20 rule states you should insure your home for at least 80% of the replacement cost. The same guideline can apply to insuring the contents in your home.

For example, if it’ll cost $50,000 to replace your belongings after a major house fire, you want to make sure you have at least 80% ($40,000) of that amount in contents coverage.

Once you’ve determined the amount of coverage you need, it’s a good idea to shop around to find the right policy for you.

Actual cash value vs. replacement cost

When insurance companies pay contents insurance claims, they typically either pay the actual cash value or replacement cost of an item, depending on the terms outlined in your home policy documents.

With actual cash value, your insurance company pays the depreciated value of your personal belongings.

For example, imagine your refrigerator is destroyed by a covered loss. Purchasing a brand-new refrigerator of the same make and model would cost $4,000. Since your insurer uses the actual cash value method, you’ll only receive $1,800 — the value of your refrigerator after several years of depreciation.

On the other hand, replacement cost coverage pays to replace damaged items without deducting for depreciation. Sticking with the example from above, if your insurer uses replacement cost, you’d receive $4,000 since that’s how much it costs to replace your refrigerator with one of the same make and model.

Insurance policies that use the actual cash value method are usually more affordable than policies that use replacement cost. However, this often results in a lower insurance payout since the value of an item is often lower than the replacement cost.

Riders for high-value items

If you own particularly valuable items, standard contents insurance may not be enough to cover their replacement costs. An insurance rider can help extend coverage beyond your standard policy limits to ensure protection.

Here are a few examples of items you might need a high-value rider for:

• Jewelry

• Fine art

• Antiques

• Collectibles

• Musical instruments

People with high-value homes (generally defined as homes worth $750,000 or more) may also want to consider additional coverage known as high-value home insurance.

How to file a contents insurance claim

To file a claim under your home contents insurance, follow these steps:

1. Take an inventory of the damaged property. The first step is to assess and document the damaged or stolen property. The insurance company will need this information to process a claim.

2. Notify your insurer. Since contents insurance is part of your homeowners policy, you’ll need to contact your home insurance company. Explain your situation and ask any questions you have about your coverage or the claims filing process.

3. Submit a claim. File a claim with your insurance company promptly to get your items replaced as quickly as possible.

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