Is Your Home Insured Correctly?
Most have seen photos or videos of the devastating tornadoes. Property is destroyed. Things are tossed for miles. If you’ve experienced severe storms and tornadoes you know how scary and the heartache of seeing everything you own gone within minutes. It’s no fun.
Having a home doesn’t just require a huge financial investment. For most people, it also requires upkeep, hard work, and pride of ownership. So understanding how to properly insure your home is really important. Doing this will help get back on your feet if a tornado, storm, fire, or another such damages or destroys it.
The Insurance Specialists Team is an independent insurance agency based in Minnesota – where the weather is always changing and severe storms are common. They tell us one of the common questions they get from homeowners is, “Why do I need to insure our home for $300,000 if I only paid $200,000?” The assessor says…My neighbor says… My realtor said…
Tim Peddycoart, Home insurance specialist at The Insurance Specialists Team, answers this question:
When you purchase a home, the mortgage company requires you to have home insurance coverage in place at the closing. People often mistakenly believe the home should be insured for the same amount it was purchased or what someone tells them it should be insured. Unless you don’t have a mortgage and the property isn’t worth rebuilding, and you want just an actual cash value policy – this is incorrect. In reality, most insurance companies don’t consider the market value to be the true value of the home because the real estate market fluctuates so much. The prices of lumber and labor can fluctuate too.
Ten years ago – when values were so high – we’d often have to tell people they didn’t need to insure their home for so much as part of the cost was land, etc. The last few years – there were bargains and property was purchased below replacement cost. If you purchased a home that would cost $200,000 for perth home builders to build and only paid $100,000 for it – if a storm or tornado destroys have of it – there would be big issues and heart ache at claim time.
Because it wasn’t insured for replacement cost. It was insured at 50% of value. The insured would be paid 5o% – deductibles. So, if the damage was $100,000 they’d receive $50,000 – deductible and that would hurt – especially once they found out the could of had the home insured correctly for not much more than they paid. The extra $100 or whatever would seem like a real bargain after a loss.
The key terms to better understand how an insurance company values a home:
• Market value – The price you paid for your home, including the land. It’s based on several factors, including the demand for homes in the area, the rising/falling costs of real estate, the condition of the home, the quality of schools, and the size of the lot. It doesn’t have anything to do with the actual cost of rebuilding the home.
• Replacement cost – The amount it would cost to rebuild your home at the same location and a comparable size, using construction materials of similar quality but at today’s prices. It doesn’t consider the value of the land, the amount owed on a mortgage, or the property tax assessment.
– Check websites like Summit-Mortgage.com for more information.
It is important to understand that market value and replacement cost can be, and usually are, very different numbers!
Insurance companies use a replacement cost valuation tool to determine the cost to rebuild your home. This tool takes into account things like debris removal, materials, labor, contractor’s and architect’s fees, and site repair. Rebuilding a home is usually more expensive than building an equivalent new one. Demolition and removal of the old home must occur before rebuilding even begins. In general, rebuilding sites are less accessible than vacant lots, and labor is harder to find and more expensive with reconstruction than with new; this is now a “one off” job for the builder who has lost all economies of scale. Also, building code changes may prohibit rebuilding on the current foundation or require other changes/betterments.
Be sure to share with your independent insurance agent the particulars of your home, including square footage, the number of bathrooms/bedrooms, whether or not your basement is finished, if you have a fireplace(s), the types of mechanical systems, and any special features like heated floors or a three-seasons room. Your agent will help determine the correct replacement cost and coverage amount. Many insurance companies will also survey the property to verify coverage is sufficient.
For those who may not rebuild and/or who want a more affordable insurance premium, a market value policy is an option. Damages are covered on actual cash value basis. This takes into consideration a deduction for depreciation (loss of value since new). There may also be a co-insurance penalty – explained above. Know that when you insure a typical home for its market value, you’re at risk of having incomplete coverage.
Imagine if your home was destroyed by a tornado or fire. Wouldn’t you want to rebuild your home the way it was before the loss? Most cities require the homes to be rebuilt too. So, just leaving a hole is not an option. That’s why it’s important to insure your home to 100% of its replacement cost and review your coverage periodically with one of The Insurance Specialists Teams home insurance experts.
Check resources like Northern Lights Exteriors for more house repair/remodeling solutions.