Do You Have Enough Insurance?
How to know if it is time to adjust your policy and evaluate the replacement cost of your home.
Owning a home is amazing. It is a big part of the American Dream and as a homeowner, you want to protect that investment. That is where homeowner’s insurance comes in. For many people, their home is the biggest purchase they will ever make and it is the biggest asset they own. It makes sense why you would want to protect it with a robust and solid insurance policy.
As the world recovers from the Covid-19 pandemic and all of the downstream effects of shutdowns continue to be felt, the costs of goods have gone through the roof. Property value and housing markets nationwide continue to see increases year over year. These changes have many people wondering, “Do I have enough insurance?” and “Should I look at changing my policy?”
These are important and relevant questions and it matters no matter the type of home you have. If you are living in a multi-family home, this is important to know. If you have a condo or a rental property, it is critical to understand if you need more insurance. To properly answer these questions, you need to understand what your homeowner’s insurance covers and how that is calculated. From there, you can ask the right questions to determine if you need to increase your policy coverage.
What Does my Homeowners Insurance Cover?
Homeowners insurance is a safety net that will reimburse you the cost of your home in the event it is destroyed or made inhabitable. There are other benefits, like liability and theft or damage coverage but the main purpose is to protect you against the destruction of your home.
However, not all insurance policies are created equal! There are a few different ways that the value of your home can be calculated. According to Investopedia, there are three main types of coverage for home insurance.
- Replacement Cost
Replacement cost is determined by the value of your home and all of the belongings inside of it without taking into consideration depreciation. This is meant to give you the coverage that would provide you with enough money to replace the home you have with the same or a very similar home with similar belongings. This is the most common type of home insurance.
- Actual Cash Value
Actual cash value is coverage that calculates the value of your home and its belongings based on their purchase price and factoring in depreciation on everything. These policies are cheaper to purchase but they will result in a lesser amount of coverage in the case of a disaster because of the inclusion of depreciation.
- Extended Replacement Cost
Extended replacement cost is the most comprehensive and thorough of the different types of home insurance because it insures you for the replacement of your home, as it was, regardless of the costs to rebuild it. That means that you can get your home rebuilt exactly as it was, even if the costs to do so equal more than the value of the home. This type of insurance is the costliest but provides the most protection.
Do I Need to Increase My Insurance if My Property Value Goes Up?
Having an investment appreciate in value is always a good thing. That is why real estate is often touted as one of the best investments you can make. As a homeowner, it may be difficult to know when it makes sense to increase your insurance coverage, particularly if your property has gained significant value. Do you need to adjust your home insurance based on the value of your home?
Not necessarily. Your home insurance covers the replacement cost of your home and does not consider its “value” as it increases with real estate trends. If it cost you $300,000 to build your home, even if the value of that property increases 5x, the replacement cost of that home most likely would not increase 5x.
What Would Cause Me to Need to Increase My Insurance?
Since it is the replacement value of your home and not the property value that determines the amount you should be covered for, the most important aspect to consider when evaluating your insurance is the cost of rebuilding your home.
Due to labor shortages, supply chain issues and other factors, the cost of replacing your home may have drastically changed in the last few years. The costs of raw materials for building alone have increased significantly. Also, the lack of manpower and skilled tradesman has made the demand for homebuilders higher than the supply.
This is the crux of the question. In some areas, the cost of replacement may not have changed significantly. In others, it could have gone up by as much as 20% or more. To understand what this means for you, you can talk to a local builder and ask about the replacement cost of a home like yours, by the square foot and determine if your insurance is adequate. Make sure to include any additions or unique and expensive add-ons or belongings in your home as that could drastically affect the replacement cost.
Check with Your Insurance Provider to Determine Your Coverage Needs
To make sure that you are properly covered, check with your insurance provider to determine your coverage needs. Protecting your assets is important and having the right amount of insurance coverage is a critical part of that protection.