Thursday, September 6, 2012

Home insurance and the dilemma of replacement cost verses market value


When it’s time to renew your home insurance policy, make the time to go over the details. Understanding the nuances in the fine print can save you money. It is up to you to decide if money today is what you want to save via lower premiums verse, lower cost to you should you need to place a claim. Because the housing market has been so volatile, and the market value of many homes is much lower you need to understand how you home insurance coverage will behave if you have to make a claim.


Actual value verses the replacement costs


Consider the replacement of the actual structure. Because the real estate market bubble burst, and has yet to come back, many homeowners are underwater with their financing. This is doubly troubling if the unthinkable happens and the home is lost to a fire or some other catastrophic event. Because the value of your home may have gone down, you might think it is time to drop the value as far as insurance is concerned. However, market value does not accurately reflect the cost of reconstruction. Often the cost of reconstruction is much higher than the cost of new construction because reconstruction may be hampered by limited access due to other existing buildings or landscaping structures.


Comparable real estate sales in the local market determine the market value or your home. It includes the value of the land/location any out buildings and landscaping. If your home is worth $250,000 on the current market (down $100,00 from when you bought it), you might consider decreasing the value on your insurance policy to save money on the premium. However, you should know what the current cost of construction per square foot is in your area. This will help you decide if decreasing the insurance value is a prudent thing. If your house is 2500 sq ft and cost of construction is $130/sq ft, the cost of rebuilding it is $325,000. The reduction in your premium could mean you cannot rebuild.


Be an educated consumer. At the time of your home insurance renewal make sure you know what the market value of your home is, and what the prevailing construction cost per sq ft is. Talk to contractors in your area to find out what they would estimate rebuilding part or all of you house would costs. Then use our site to compare quotes and get the best protection for your budget.


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