Understanding Home Insurance Valuation
Your home is likely one of the largest investments you’ll make in your lifetime, and it makes sense to do everything you can to protect that investment. Having your home properly insured is part of that protection, but many home owners do not understand how home insurance valuation works.
The most common misconception regarding home insurance valuation is that you only need to insure your home for the cost of the loan. On the surface it makes sense – you want to insure your home for its value. However, this value is quite often too low to adequately insure your property. For example, let’s say that your home was built in 1980, and has a value of $225,000. If something happened to your home that necessitated repair or worse, a complete replacement, it would cost much more than that in today’s dollars to rebuild your home. In todays economy, you can often buy a home for less than you can build. Without a replacement cost policy, you risk being in a situation where you would be unable to replace the quality and or size of home you are accustoming to owning.
Replacement cost is a term used in home insurance to determine the amount of money it would take to rebuild your home in today’s dollars.
Determining the Replacement Cost of Your Home
Your insurance agent will do a variety of different things to arrive at the replacement cost value for your home. Many agencies rely on software that helps calculate the structure of the home and its components to come to this figure. While the value of your home does come into play, the replacement value is going to give you a true picture of what it would take to rebuild your home. They will use the size, quality of construction, features of the home, and location to help determine the value.
The Cost of Being Under-Insured
When you are not insured to the full replacement cost of your home, there is something called a co-insurance penalty. Basically this means that if you have insured your home for less than 80% of the replacement cost, you will be responsible for part of the repairs needed for your home.
This means that you could be paying a substantial amount for potential repairs, in addition to the amount you’ve already paid for your deductible and your premiums.
While it may cost slightly more to insure your home to replacement cost, in the end you’ll end up saving money and you can rest assured that your investment is completely protected. The whole point of home insurance is protecting your investment and reducing the amount of risk you have to face. Insuring your home properly helps you transfer the risk from your responsibility to that of the insurance carrier.
