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November 2, 2015

Insuring your home to full replacement value

Obtaining insurance for your home is a basic part of homeownership and a decision that often happens quickly during the closing process. However, for what is likely your most valuable asset, it’s worth taking the time to consider your coverage options and determine the right amount of insurance for your home.

Studies show that nearly 60% of homes in the US — that’s two out of every three — are underinsured by at least 18%.1 This means that if there is a total loss, such as a fire, the homeowner may find they are responsible for a significant portion of the rebuilding cost. Working with an insurance advisor to navigate your home valuation considerations will help eliminate confusion and help ensure an appropriate settlement in the event of a loss.

Replacement cost coverage

Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage. However, if you don’t insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss. Also, some insurers may provide only functional replacement cost, which may not cover the cost to rebuild your home with materials of like kind and quality.

When you insure your home to 100% of its replacement cost value, some insurance companies will offer the benefit of extended replacement cost. This provision will pay beyond your policy limit should the amount at the time of loss not be adequate. Most policies require that you insure your home to at least 80% of the amount of rebuilding cost in order to get a replacement cost settlement. If you are insured for less than that at the time of loss, you may receive an actual cash value settlement — which factors in depreciation related to the property’s age and condition — or be required to pay a proportionate share of the loss. If you have financed the purchase of your home, your lender will likely require that you insure your home for at least the amount of your mortgage. It’s important to talk to your insurance advisor regarding your policy details and stipulations.

Valuation scenarios

Although there are various factors that go into determining the insured value of one’s home, purchase price is often not the most important variable. This often leads to questions regarding how valuation scenarios are determined.

“If I paid $500,000 for my home, why would it cost $600,000 to replace it?”

Insuring for more than the purchase price of a home may be recommended when the home has unique features such as a slate roof, plaster walls, or intricate molding or woodwork. It often costs more than the current market value to replace older, historic homes or high-end custom homes in order to match the original materials and craftsmanship as closely as possible.

“The market value of my home is $1.2 million. Why would I only insure it for $850,000?”

In addition to the house itself, a property’s market value includes the land value, and its location — the beach, a ski slope, a prime neighborhood — is a significant aspect of the market assessment. There are also other factors, including the local real estate market, area demographics, and condition of neighboring properties, to name a few.

Your insurance will cover the cost to rebuild the structure along with related fixtures and systems; the market value is not a key factor in determining its replacement cost.

“How could it cost more to reconstruct a home that was just built?”

Builders in new home construction take full advantage of economies of scale and preferential prices on materials for use in new construction and these cost savings are passed on to the purchaser. However, reconstruction after home damage, the contractor may not have access to the same materials at the same price. Further, the cost of materials, such as lumber and copper, as well as labor and transportation change frequently. Most carriers monitor inflation rates to account for these variations, which is also one reason why values on existing insurance policies may increase from year to year.

Expert advice

The amount of homeowners coverage you choose is dependent on your specific needs. Insuring your home to its full replacement value will help avoid significant out-of-pocket expenses that could eat into your savings and alter your estate plan. In addition, one should also consider the home’s contents, other structures on the property, additional living expenses, liability, and more. Talk with your personal risk advisor about the appropriate amount of coverage for your home and the best way to structure your policy. They can help you consider options from various insurance companies so you can make an educated decision on the protection of your home.

The insurer makes a difference

For high-value homes, coverage provided by standard carriers rarely provides the level of adequate protection. It’s important to work with premier insurers who understand the unique needs of exceptional homes.

Like kind and quality

Not all insurance companies will cover replacement with materials of like kind and quality to those originally used. Insurance companies that specialize in high-value property are more likely to cover specific characteristics, artistic craftsmanship, and architectural details that are often hallmarks of high-end homes.

Extended replacement cost

When you insure-to-value, some carriers will automatically provide extended replacement cost. If it costs more to rebuild the home than originally estimated, this type of policy will provide coverage above and beyond the amount of coverage, ranging from 125% to unlimited coverage (depending on your state and insurer). This will help account for increased costs due to inflation as well as the need to comply with building code ordinance or law changes.

Extra services

Premier carriers not only offer policies with the appropriate coverage, they often provide additional services to help protect the home from loss. These services may include:

  • In-person inspections and appraisals to properly value the home and provide risk mitigation suggestions.
  • Engineering screenings to identify and correct potential causes of loss before they happen.
  • Detailed reports of your home’s unique features to help recreate them to exact specifications in the event of a loss.

Keep your Personal Risk Advisor updated if you plan to make any renovations or additions to your home. Even small changes can affect your homeowners policy and valuation. Plus, some insurers require notification if you’re making home improvements.

1Marshall & Swift/Boeckh

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