“My home’s worth only $120,000. Why does my insurance company want to insure it for $275,000?”
One of the biggest questions we have regarding homeowner’s insurance is regarding the amount to insure the dwelling (home) for.
When purchasing a house, the mortgage company requires the homeowner to obtain insurance prior to closing. Most people assume the amount of dwelling coverage will be equal to the amount they paid for their house. In many cases this is incorrect.
There are different methods to determine the value of a house. Market value is the price paid for your house. Replacement cost is the cost it will take to rebuild your house in the same spot, same size, and same quality of construction… at today’s costs. Insurance companies use the replacement cost valuation. These can be two completely different amounts.
For example, a home purchased in a depressed city neighborhood, may have a market value of $120,000. The exact house, located in a nice suburb, may have a market price of $285,000. Regardless of the location, the cost to rebuild the house after a loss would be the same. The insurance company is looking to insure the home for the full replacement value, not the current market value. Remember, they are going to pay to build you a new home, not buy one for you down the street.
|Home in Thriving Suburb||Home in Depressed Neighborhood|
|Square Foootage of Home||2,500||2,500|
|Cost to Replace/Rebuild Home||$275,000||$275,000|
So, for insurance purposes you should insure your home for 100% of it’s replacement cost. This will ensure you have enough coverage to rebuild the entire house in the event of a total loss.