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Do You Have Enough Insurance to Rebuild Your Home?

Is the amount of property insurance on your home correct?

Many homes are either underinsured or over-insured. For example, some homes insured for long periods of time with one insurer may have inadequate limits of insurance due to increased building costs. In many cases, homes have been remodeled and improved, and this information has not been conveyed to the insurance agent or company, resulting in severe underinsured home values. If the home is underinsured, you may not only have inadequate protection for total losses but may also lack full protection for smaller losses.

Sometimes homes are mistakenly insured for their market value. However, market value is normally not indicative of the home's replacement cost. For example, market value also reflects the non-destructible land value. In addition, some homes may be insured improperly to meet mortgage company requirements. Some mortgage companies require the amount of insurance to be at least equal to the mortgage balance on the house. The mortgage balance is not reflective of the home's replacement cost, which is often considerably more but can also be less. Insurance companies and agents often struggle in properly educating mortgage companies about these distinctions, but there is nothing to prevent the insuring of the home to actual replacement cost if that is indeed greater than the mortgage balance. The problem occurs when the mortgage balance is greater than the replacement cost, which will result in the purchase of a higher limit than needed.

The bottom line is that you should work closely with your insurance agent and insurance company to determine the correct replacement cost and resulting insurance limit for the home. The following factors impact the replacement cost of your home:

  • Square footage of the home, including its configuration
  • Construction costs in the community
  • Exterior wall construction type, including frame, stucco, brick, or brick veneer
  • Style of home
  • Number of bathrooms and bedrooms
  • Roof type
  • Attached garages, fireplaces, built-in cabinets, and other special features, such as hardwood floors

As a final note, you should be aware that you should be aware of increasing building supply and labor costs and the “surge” in construction cost following catastrophes such as hurricanes. Adding an "inflation guard" endorsement to your homeowners policy can help assure that the home is properly protected.