Coinsurance Concerns: Buying the Cheapest Home Insurance Could Cost You More in the Long Run

Not long ago, I received a letter from an insurance company offering to lower my homeowners premium to just $44 per month — less than 10 percent of what I currently pay. It sounded appealing — until I looked closer. The policy’s low coverage limits, paired with a coinsurance requirement, meant a single roof claim could have left me paying most of the repair costs myself.

Coinsurance is a clause in many homeowners policies that requires you to carry insurance equal to a minimum percentage — often 80 percent — of your home’s rebuild cost. It describes how you share costs with your insurance company when a claim arises. If your coverage falls short, your claim payment may be reduced, sometimes by thousands of dollars.

Understanding how coinsurance works can help you avoid unexpected expenses and confirm that your coverage meets your needs.

What is coinsurance?

Coinsurance is a condition of your homeowners policy that requires you to insure your home for a minimum percentage of its total insured value at the time of the loss. A common coinsurance requirement is 80 percent, meaning if the total insured value of your home is $300,000, you must carry coverage limits of at least $240,000. If you don’t meet this requirement, your claim payment may be reduced in the event of covered damage.

There’s a lot going on in that first paragraph. Let’s break it down step by step.

Some insurance professionals and adjusters informally refer to this as a “coinsurance penalty.” However, the policy itself does not call it a penalty. It is a contractual condition. A policy condition is a provision requiring you to perform an act or meet a standard, so the insurer can fulfill its promise to pay a covered claim.

This condition means you must insure your home to a minimum percentage of its replacement cost, not its market sale price. Many homeowners mistakenly base coverage on market value, but the policy refers to the insurance to value (ITV) — the cost to rebuild the home at current prices.

The sale price includes factors such as land, location and local demand. By contrast, the ITV reflects construction costs. For example, a three-bedroom home may sell for more in one ZIP code than another, but the cost of materials and labor to rebuild it is typically similar within the same region. In some cases, the rebuild cost can be lower than market value, but in others — especially after disasters — it can be higher.

Determining rebuild cost before a loss can be challenging, which is why underinsurance is common. Industry sources report that as many as 75 percent of homeowners are underinsured, with average underinsurance levels exceeding $300,000 for specific disaster events, like the 2017 California North Bay fires.

When cheap insurance costs thousands

As a claims professional, I have had to explain to hundreds of homeowners that their pursuit of lower premiums meant spending far more out of pocket after a claim.

Earlier, I shared how a marketing letter offered me a dramatically lower premium by reducing my coverage. Here’s what that would mean in practice. The proposed policy limits were significantly lower than my home’s rebuild cost.

The carrier recommended policy limits of $293,000. When breaking down the ITV of my home, I can tell right away that their proposed limit wouldn’t be enough to meet coinsurance requirements — let alone rebuild my home in the event of a total loss.

To determine the appropriate limit, I calculated my home’s estimated rebuild cost:

• Square footage multiplied by local construction costs
• Adjusted for:
  • Number of rooms, bathrooms and stories
  • Type of construction materials
  • Interior finishes and custom features
  • Labor costs in my area
  • Local building codes and permit fees
  • Specialized features such as fireplaces and solar panels

In my case, the rebuild cost was $886,000 — much higher than the proposed limit.

Why coinsurance clauses exist

Most claims are partial losses. According to industry data, fewer than 2 percent of fire losses are total losses. However, 86 percent of fire losses result in damage exceeding 20 percent of the building’s value. Even in partial losses, coinsurance still applies if your coverage falls below the minimum requirement.

Coinsurance provisions encourage policyholders to maintain adequate coverage. They promote fairness in premium calculation and help prevent situations where property owners are deliberately underinsured to save money while still expecting full payouts.

The 80 percent threshold also functions as an incentive. Some carriers won’t write policies below this baseline, opening up more carrier options for homeowners willing to insure their home to value. Policies meeting this requirement often qualify for a premium discount, encouraging homeowners to sufficiently insure their properties.

The underinsurance problem

One of the challenges with coinsurance is that the assessment occurs at the time of the loss — when it is already too late to make adjustments. Insurance contracts with coinsurance clauses state your coinsurance responsibility, but if you don’t know what coinsurance is or what it means, you might be tempted to underinsure your home without realizing the potential consequences. Even homeowners who do understand coinsurance can accidentally become underinsured by not considering recent home upgrades or underestimating changes in local construction costs.

Inflation can further complicate matters. The annual inflation rate was 2.7 percent in July 2025. Material prices rose 4.35 percent from July 2023 to July 2024, and labor costs increased by 4.3 percent. Even if your coverage was sufficient when you purchased your policy, these rising costs could leave you underinsured when a claim occurs.

How to reduce the risk of underinsurance

• Review your coverage regularly: Confirm that your limits reflect updated construction costs in your area, especially if you’ve recently made upgrades or repairs to your home. Be aware that agent estimates may not always match actual local costs, especially after widespread disasters.
• Consider endorsements: Some insurers offer agreed value endorsements that waive coinsurance requirements if you meet certain conditions.
• Ask about inflation guard: This policy feature automatically increases your coverage to keep pace with rising costs.

Bottom line

Everyone wants to get more value for their money, but selecting lower policy limits can ultimately cost you thousands more after a claim.

Coinsurance provisions are designed to encourage adequate coverage, and meeting the requirement can provide both premium savings and peace of mind. Insuring your home to value in accordance with the coinsurance clause helps ensure that, if you experience a significant loss, you won’t be left paying unexpected costs beyond your deductible.