If you’ve ever purchased home insurance before, you may have noticed a glaring paradox between the amount you’re told to insure your home for and what you know your home to be worth.
Let’s say, for example, that you’re preparing to purchase a home for $150,000. Before the final sale, you go about the business of handling your home insurance. But when you speak to an agent, they tell you that you’ll need to insure your $150,000 home for $300,000.
What gives?
This is one of the most common questions we get from homebuyers — Why in the world would I need to insure my home for more than it’s worth?
As it turns out, there is a very good answer. Below, we will explain exactly why this conundrum may occur and how you can better understand the home insurance buying process.
What Amount of Home Insurance Do You Need?
Understanding the home insurance buying process is all about understanding two key terms: Market value and replacement cost.
Both of these terms are valuations of a home or, in other words, they are two ways to look at the value of your home. The reason these two valuations will inevitably be different is that they each come at valuing your home from different angles.
Let’s look at market value for starters. The market value of a home is how much it is worth on the market. How much would someone be able to sell your home for right now, if the sale were between two willing parties?
On the other hand, replacement cost refers to how much it would cost to replace your home were it to be destroyed in an event such as a fire or a tornado.
Replacement cost is always going to be different than market value, primarily because it costs more to replace a home. Building a home up from nothing means factoring in things like building permits, architects and engineers, labor for hire, building materials that match the original quality of the home’s materials, and more.
Also, replacement cost is not going to consider the cost of actual land — or your lot. Market value, on the other hand, will definitely include the cost of the home and the lot.
Things like furniture and clothing shouldn’t be considered in replacement cost because they are considered personal property inside the home (also known as a home’s “contents”).
The type of insurance we are talking about here is Coverage A insurance (also known as dwelling insurance). This type of insurance does not cover personal property. Instead, personal property or “contents” will be covered elsewhere in a homeowners insurance policy.
Using Replacement Value to Determine How Much Insurance You Need
Calculating your home’s replacement cost to determine how much Coverage A homeowners insurance you need can be quite confusing. While you won’t be considering things like furniture and personal belongings, you’ll still need to figure out how much it would cost to replace things like your roof, the exterior finish on your home, cabinets, and flooring.
Furthermore, those with mortgages will need to follow coverage guidelines dictated by their lenders. This can be an added confusion, but failing to understand these provisions can mean trouble with your mortgage.
The best way to ensure that you have adequate homeowners insurance for your home is to speak to an experienced agent.
At Couri Insurance Agency our agents are friendly and supportive. We’d be happy to help you figure out the type and amount of insurance you’ll need in order to protect your home and family adequately. Contact us today for more information!
