Surprise! The value of your home is different for you than it is to the insurance company. At first you might think that your home is undervalued and needs to be what the current market value would be. Maybe your neighbor a couple of doors down sold his home for $700,000 and you think your home should be insured for that amount since it is very similar in quality and size. Well, that is not exactly how it works for the insurance coverage limit. A home’s market value reflects current economic conditions, the value of the land, location, and other factors that have nothing to do with the actual cost of rebuilding a home and replacing its contents. When a home is sold–the land has its own value. The insurance does not cover the land the home sits on for insurance protection. Only the home.
We have a term called “Insurance to value”. This is the coverage required to build an as-close- as-possible replica of your completely destroyed home. Think of it this way…after a major storm, you don’t want to worry about whether you have enough insurance coverage to repair or replace your home and all the upgrades you might have done over the years… you want to be comfortable in knowing that the value estimated with the replacement cost guides used are appropriate. Remember too that the best estimates for replacing your home include building materials and labor after a major event(construction costs go up significantly). With this thought in mind, homeowners should have the added endorsement for “Extended” or “Enhanced” dwelling coverage to help protect themselves against such replacement cost value fluctuation.
Example: A home is insured for Coverage A at $100,000. Following a total loss, reconstruction costs amount to $120,000. Without extended dwelling coverage, the policyholder could incur significant out-of pocket expenses or be forced to make difficult rebuilding choices to reduce the cost. With 50% in extended dwelling coverage, the homeowner would have additional limits available. 50% Coverage A is increased to $150,000
To properly figure your insurance to value/replacement cost of your home, good insurance agents will ask you everything about your home, the flooring, lighting, square footage, type of construction, etc. As we all know all homes are not created equal. While the home next-door looks the same, it has been completed updated and remodeled with Italian marble floors and designer kitchen and baths. The reconstruction cost is completely different than that of a modest residential home with no upgraded features.
Just remember- contact your friendly agent every time you remodel or change your home inside and/or out. Also, if your policy was written 5-10 years ago, your insurance needs to be reviewed as the current calculations were not used back then and your home value needs to be recalculated.