June 26, 2017

Insuring to Replacement Cost

Insuring to Replacement Cost.

 

The following article is copied from the Insurance Information Institute’s website.  The link to the original article can be found here.

Background
Property insurance is designed to cover the costs to rebuild a home, and insurers often require their policyholders to carry sufficient insurance to cover rebuilding costs if major damage occurs. When pricing insurance policies, insurers seek to match insurance to the value of the property in order to charge the right premium for the risk they assume. However, property values change, so it is important to reappraise values every few years. Additionally, when the real estate market is strong, policyholders may think they must match insurance coverage to the inflated home price. Conversely, when the real estate market declines, many people think their insurance should drop to the depressed-market price. The first scenario can mean you are over insured, while the second can leave you underinsured. For that reason, property insurance is priced on the cost to rebuild, not real estate value.
Why real estate value is irrelevant to insurance prices
A home’s real estate value includes the price of the land, which should not be factored into your insurance price. A home built on the coast will naturally have a real estate value that is higher than an identical house built inland. However, the cost to rebuild that home in either location may be nearly the same. For that reason, homeowners should work with a building expert or use one of the online building evaluation tools to determine what their home would cost to rebuild today, keeping in mind that new construction must comply with Florida’s latest building codes – a fact that could increase the costs rebuilding a home constructed prior to 2002 when the new building codes were adopted. Rebuilding costs do not fluctuate like housing prices and typically increase annually. If insurance does not cover the value of the home and homeowners carry less than full coverage, they would have to come up with money from their own pocket to rebuild the home.
Low mortgage, less insurance?
Mortgage companies require property insurance to protect their investment, and some lenders may not allow homeowners to change the amount of insurance if a home’s value drops. While some lenders may accept insurance on only the mortgage balance, most insurers prefer not to offer policies for partial coverage because it is not possible to make a homeowner whole with partial coverage, and the premium the insurer collects would be far less than the risk the company assumes. Insurance is about protecting your home, which for many people is their biggest personal asset. Talk with your insurer about options for reducing premiums.

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