Is your home OVERinsured?

“Your life is not stagnant, therefore, your insurance shouldn’t be either.”

Of course we are always more concerned if we are underinsured, it’s always the question you ask yourself. Do I have enough insurance? Will I be covered in the event of a loss? What happens if I make a claim?

These are all important questions, even more important is to be given the correct answers.

What homeowners don’t know is that their homeowners insurance policies need to be evaluated annually. Without doing so your home could currently be UNDERinsured, and believe it or not, OVERinsured.

Properties are evaluated for a “reconstruction cost” or “replacement cost” valuation which in basic terms: is the cost to rebuild your home based on cost of material (boards, nails, shingles, etc.) and labor. This coverage is a dollar amount listed on your homeowners declaration page. This amount is referred to as Dwelling Coverage and/or sometimes Coverage A.

This amount is not always determined properly. I’ve seen countless declaration pages that are tens of thousands of dollars undervalued. I have also seen many who are tens of thousands OVER valued. I’ll tell you how this happens.

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Under Valuation

When your homeowners policy is not adequately insuring the replacement cost or reconstruction cost of your home there are many factors that could have led to this. One, and the one I see more prevalently, is that your home was insured during the sale/escrow for the market valuation. Market value is the estimated price at which your property would be sold on the open market between a willing buyer and a willing seller under all conditions for a fair sale [1] Market value is not an accurate representation of what your home should be insured for.

  1. Market value has nothing to do with the actual cost it would take to rebuild your home.
  2. Market value fluctuates throughout the year, and is based on supply and demand, along with comps in your area.

As you can see, market value has no bearing, whatsoever, on the cost associated to reconstruct your home. Yet, so many insured’s properties are covered for the market value, not the reconstruction cost.

Perhaps you purchased your home during a “buyers” market, and your insurance company has you valued for market value. Your coverage amount may need to be re-evaluated. If these things aren’t regularly looked at you could end up with a partial or total loss of your home and not have adequate funds to reconstruct your investment/home.

Over Evaluation

Yes, this is an issue to. From time-to-time you can find homeowners policies that have overvalued the cost to reconstruct your home. When I determine the reconstruction cost of a property I use a valuation system that takes into consideration every aspect of your property. This includes information from, what type of roof you have, the size of your kitchen, whether you have upgraded rooms or not, the percentage of carpeting, to tile, to hardwood flooring, etc. I then review the average dollar per square foot it costs to reconstruct property within your zip code/area. Based on these two valuations I develop a median, which is what I insure my properties at. This gives an accurate representation of where your property valuation on a reconstruction/replacement cost basis should be.

You don’t need to be paying for coverage you don’t need. If your home doesn’t take $400,000 to rebuild, then you don’t need $400,000 in dwelling coverage.

Vice versa, if your property requires $400,000 in Dwelling coverage and you currently have $320,000 you’re looking at ending up with a severely smaller house if you have a total loss of your home.

On average, based upon a home located within a mid-range residential area a 2,000 square foot home should be insured from anywhere between $360,000-$400,000 (Please note, this is a rough approximation, and does not take into consideration specialty systems).

A 1,500 square foot home is in the range of $270,000-$300,000 (Please note, this is a rough approximation, and does not take into consideration specialty systems).

How we fix this…

We take steps to accurately evaluate each and every property to guarantee proper coverage is put into place to protect you and your family. My agency is concerned for the well-being of you and your family and we take pride in knowing that your coverage will restore you to the place you were prior to a claim/loss.

My agency performs annual, if not biannual reviews of all my client’s policies. We review all figures, coverages, and confirm that everything is still relevant, and make changes as necessary. Your life is not stagnant, therefore, your insurance shouldn’t be either.