Why should I insure my home for more than it's worth?
Recently, I had a client bring in the sales brochure for their home. The realtor had listed it at $153,000. They also had the tax assessment on the building showing $127,000. Putting them on my desk they demanded to know why they had insurance coverage at $260,000 when the house was only worth $153,000.
I explained to them comparing market value and a tax assessment to their insurance coverage is like comparing an apple to an orange. They look somewhat the same but they are really very different. But that didn’t answer the real question: “How do I determine what my home is worth and how much insurance I need?”
Lets look at how the realtor determined the numbers you are comparing to your insurance. To a realtor, your home is worth what a buyer is willing to pay for it, or the “fair market value”. Besides using local comparables, this value is based on a lot of factors. Some of these are:
The desirability of the neighborhood - do you live next to the town dump or in the “nicest” section of town?
How good are the local schools?
Are you too far from or too close to a major roadway? Are you so far from a good road, it takes an hour to get to the grocery store or are you less than a mile from the local Super Center?
Is your house worth more if it is beige or white rather than Pepto-Bismol pink? Home stagers would like you to think so.
And there are a hundred other factors. We won’t even go into how the tax assessor calculates what your home is worth as every town seems to have a different formula for figuring that out.
Now look at how the insurance company determines the replacement cost of your home. This number is more black and white. If your home were damaged, what would it cost to repair your home to the original condition and quality? Neighborhoods, siding color, school system… none of this matters. The only thing we put into our calculation is what would the lumber yard charge for the lumber, sheetrock, nails, fixtures, etc. needed to rebuild your home and what the average contractor would charge to put it all together. Generally, this is a calculation based on square footage, the number of bathrooms, the type of materials used and any special features such as crown molding or custom cabinetry. Since most insurance companies only write homeowners’ policies for 100% of the replacement cost, this number also tells you how much insurance you need. If you don’t insure to at least this value, it could be financially devastating. Your home is likely your biggest asset and helping you protect it is why we are here. For more information on insurance-to-value, visit our website or call us at 877-352-2121.
