Should You Insure Your Home for More Than It’s Worth?

May 23, 2018

Your home value dropped recently so you think it’s okay to drop the amount of homeowner’s insurance that you carry. If your house is worth less, why would you want to insure it for more than its value? There are many reasons that insuring your house for more than its current value is probably a good idea.

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Keep reading to learn the factors you should consider.

Market and Replacement Value

The value you are probably thinking about when you consider your home’s worth is the market value. This is how much a buyer would currently pay for your home. This has nothing to do with how much it would cost to replace your house should you have a total loss. The replacement cost is what you want to focus on when you are considering insurance.

The market value of your home is influenced by a variety of factors, some of which include:

  • The condition of the property and house
  • The age of the house
  • The features of the house
  • The school district’s ratings
  • The area’s condition
  • The area’s crime rate
  • The sales price of similar homes in the area
  • Supply and demand in the area

None of these factors has anything to do with the cost to rebuild your house should you have a total loss. That’s where replacement cost comes into play. This is the estimated cost to rebuild your home in its current condition. This cost does not include the cost/value of the property, just the home’s structure, and the cost to rebuild it.

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Insuring Your Home for More Than It’s Worth

Going back to how much you should insure your home for, don’t pay attention to its current worth. This is especially important if there was a recent decrease in the values of homes near you. This doesn’t mean run out and decrease your homeowner’s insurance coverage. You want to keep it as is or at least as much as your agent recommends based on their evaluation of the cost to rebuild your home.

If you do have a total loss and your home is insured for more than its worth, it’s not a guarantee that you will receive that full amount. Insurance payments are based on the cost of the actual loss at the time of the loss. The adjuster will determine the cost to rebuild the parts of the house that were lost (or the entire house in some cases). They will then pay for those replacements. The amount of insurance that you carry is not a guarantee of the amount you will receive, but it does limit how much you can receive. For example, if you had a loss of $500,000, but you only carried $400,000 in insurance, you would only receive a maximum of $400,000.

When you buy homeowner’s insurance, don’t focus on the home’s current market value. Instead, focus on the replacement cost. Replacement cost is different than actual cost too. If you include the replacement cost rider on your homeowner’s insurance policy, your insurance will likely cover the cost to replace your home even if the cost of lumber and other materials increase since you purchased your property. It’s important to talk to your insurance agent to ensure that you get proper coverage for your home.

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