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Subscribe to RSSMost homeowners have insurance. The question is: do you have enough insurance? Will your policy cover you if the worst happens – if your house is totally destroyed and you need to rebuild?
According to the Insurance Information Institute’s 2011 Insurance Pulse Survey, nearly half (48 percent) of all homeowners in the U.S. believe the insured value of their home is linked to its market value.
“They are two different things,” says Michael Barry, the institute’s vice president of media relations. “When it comes to buying homeowners insurance, you have to look at the insured value – what would it cost to rebuild my home in its current location with comparable construction materials if I were to have a total loss? And that number does not represent the market value.”
With home prices in the toilet, it’s easy to assume that you can save money by lowering the insurance coverage. Unfortunately, it doesn’t work that way. The cost of building materials – copper, lumber, steel, concrete – have all gone up dramatically the last few years.
“It’s truly unfortunate that people don’t understand market value versus replacement cost,” says Rudy Werle, vice president of claims for the Grange Insurance Association, a regional insurance company based in Seattle.
Werle recalls a recent claim for a house that burned to the ground and the homeowner was grossly under-insured. He had coverage for up to $350,000, but the estimated construction cost came in at $500,000. Werle says this customer was “one of the rare individuals who accepted responsibility” for the situation.
The insurance company did its best to help, but the new house did not have the quality of the original. The homeowner had to downgrade the kitchen appliances. Instead of granite countertops, he went with composite. He also had to settle for a lower-quality roof; one that was guaranteed for 30 years instead of 40.
Getting the right coverage is your job
Experts say it’s smart to review your insurance coverage each year before the policy renews. But most people don’t do this.
Angie’s List recently polled its members and found that nearly one-third of those who responded hadn’t checked their home insurance policies for two years or more.
“This is your responsibility,” says Angie Hicks, the website’s founder. “Your insurance agent doesn’t know what you’ve done to your house. They don’t know if you added a deck or bought an expensive piece of jewelry. Only you know that information.”
So put this on your calendar to make sure you’re reviewing your policy at renewal time.
At the very least, you want to know what you have. Then you can tweak the policy or comparison shop. Make sure you don’t buy too much insurance. You don’t need to insure for the value of the land your house sits on.
According to the Insurance Information Institute, there are four elements that help you decide how much coverage to get:
- The cost to rebuild the structure.
- The cost to replace the contents.
- Additional living expenses if you have to move out during repairs.
- Your liability to others who might get hurt on your property.
If you’re looking to save money raise the deductible, don’t cut back on coverage. The Insurance Information Institute says increasing the deductible from $500 to $1,000 could reduce premiums by up to 25 percent.
Remember: the amount of money the policy will pay for contents and additional living expenses is typically based on the coverage of the structure.
It’s important to have a home inventory to show the insurance company if there is a loss. The free app MyHOME Scr.APP.book (available for iPhones and Android phones) from the National Association of Insurance Commissioners lets you quickly photograph, grab bar codes and serial numbers and store them digitally. There is also free software for your computer at knowyourstuff.org, a site run by the insurance industry.
Note: Expect higher rates for homeowners insurance this year. Bloomberg reports that Allstate, Travelers and State Farm, as well as other companies are raising rates. The price hikes are a result of poor return on investments and higher-than-expected storm losses in the U.S. last year.
More Information:
Insurance Information Institute: Homeowners and renters insurance
National Association of Insurance Commissioners: It pays to know your stuff
Leave a Comment:
The article doesn't mention one big problem with replacing contents - depreciation. Most standard insurance pays to replace contents at their depreciated value (what it cost when purchased, minus depreciation.) If you have a 12-years-old refrigerator and range, the policy will replace them with enough money to buy 12-years-old appliances of similar model.
Make sure you have FULL REPLACEMENT COST insurance for your belongings, whether you own or rent. It costs more, but it replaces your stuff with new items at the current price. This is even more important in times of high inflation.
And if you have collectibles, antiques or other valuable items, have them inventoried and listed on a policy rider - that way there will be no question of coverage. Again, there may be some additional premium expense, but the insurance will do what you wanted it to do - replace the stuff that is lost.
In the article: "Remember: the amount of money the policy will pay for contents and additional living expenses is typically based on the coverage of the structure."
That means the LIMIT for contents (maximum amount the insurance will pay) is based on a percentage of the structure limits. They don't just automatically pay that limit. The insured person must list each item lost, with the purchase price and age of the stuff. They pay for the actual loss and expenses, up to the limit. The company can be flexible with proof of loss (if they want to be flexible), but a good home inventory helps tremendously. Remember to store the list and photos somewhere else.
Off the top of your head - how many shirts and socks do you have? How many books, records, dvds, photo albums, etc?
This article doesn't mention how you should figure out the cost to rebuild your house. Who knows those things? Why do articles like this never tell you the important things?
sq ft multiplied by $150, ore 180 if construction is more complicated, and 200 to 250 for luxury performance, is the basic amount. Today's days the labor is a lot less expensive.
“It’s truly unfortunate that people don’t understand market value versus replacement cost,”
Nothing 'unfortunate' about it, just another example of the overwhelming ignorance in this country.
Beware the agents/. I was shopping around for a replacement policy as mine had gone up again and an agent said I could get a policy for $250.00 less. When I pressed him for the coverage he stated that it was insured for $200,000.00 for a split entrance with 1030 sq feet. What he did not ask is that the home has two finished stories with the basement finished with a wet bar and an attached garage beyond that. Even though the realtor said that the house has listed space of about 1000sq feet, the home replacement is closer to $324,000.00 as I had. This insurance agent was about to under insure me and would have cost me almost half the value of the house. Knowing your value was key and why I always ask for the replacement cost listed and a rider listing that on the policy. I renewed my coverage for the higher figure and shopped around for that replacement value. Came to know that that was a competitive policy and since I had a claim the company was eager to continue to keep a good paying customer and recoup some of their payout. Always am careful of saving money on insurance as mostly they just cut your benefits. Not really saving when there is a claim.
Hey Dan, Sometime people pretend to understand everyone's job/business. Your house on/through the comments you gave is properly insured is 1030 sq feet. Garage is added as additional amount, personal property with your wet bar, etc are added amounts as 5 of the core amount. You just decided to pay more to the insurance company.
Look if you have some important coverage as sump pump failing and water back up. About reconstruction cost, if you are very worried, you can check on line about it in specialized web sites, but look better on the proposal the agent gave you. Good luck.
This logic doesn't make sense to me. Why insure your house for replacement cost if it's higher than the market value? So your house burns down and you have it rebuilt. Then it's immediately worth less than you just paid to rebuild it. Why not just find a similar house for sale nearby and buy it for less than it would cost to rebuild yours?
Because if you did that, you wouldn't have enough money to pay off the mortgage!! You need enough coverage to pay it off, should you decide not to rebuild.