Cost to Rebuild Coverage
The neighborhood, the amenities, the square footage – you carefully considered everything about your home before purchasing it. So carefully that perhaps your insurance policy was just an afterthought.
However, a home is one of the most valuable purchases you’ll make in life, so it only makes sense to protect it with adequate insurance coverage. But, what exactly is adequate for your home and why? The general rule of thumb is this: You insure your home for what it would cost to rebuild at today’s prices, using today’s building codes and standards.
In the insurance world, we generally refer to this as the “cost to rebuild,” and it’s essential to understand why it’s important. I’ve addressed three insurance misconceptions that should help.
- Misconception 1: You should always insure your home for the market value.
The cost of labor, materials and other expenses oftentimes make it more expensive to build a house than to buy one that already exists. And, that’s why you typically insure your home for more than what you purchased it. A home you buy for $200,000 may require $500,000 of insurance to completely rebuild it. Then again, if you pay a premium for the location of your home, you may need to insure your home for less than the market value. For example, you may pay $1.5 million for an oceanfront property and be able to rebuild the home for $750,000. Your home insurance policy would reflect only the cost to rebuild, without factoring in the high value of the land.
- Misconception 2: Homeowners coverage should stay the same – or even decrease – over time.
Your homeowners coverage shouldn’t decrease as your mortgage decreases. Just because you owe less on the home doesn’t mean it would cost less to rebuild. If you think about it, the cost of milk right now is far different than it was 20 years ago. Labor and materials go up in price as well, so your insurance shouldn’t fall behind. As you maintain and update your home, such as remodeling the kitchen or adding a deck, you should reassess your insurance coverage, too.
- Misconception 3: You’re covered if your home needs to be brought up to code during a claim.
Not necessarily – it depends on your policy. In some instances, you may need to purchase optional coverage to handle the increased cost of bringing your home up to code or complying with local ordinances.
The last thing any property owner wants is for their insurance policy to fall short when they need it. That’s exactly what might happen if you buy into any of these insurance misconceptions.
Instead, work with an independent insurance agent to help ensure you get the home coverage you want – not too little and not too much. An estimate of what it would cost to rebuild your home from a contractor or builder in your area may help, but it’s not necessary. Your agent will talk to you about the square footage, upgrades, special features and other aspects of your home to build the policy you want.
Remember, your insurance doesn’t buy you a house. It repairs or rebuilds the one you’ve got. So, be sure your homeowners coverage reflects the true cost to rebuild.