When I meet with a client to write property insurance, whether for a personal home or business, the insurance value becomes a sticking point. I often hear questions such as, “Why would I want to insure my house for $210,000!? I can’t sell it for that.” or “My appraisal says it’s worth $150,000”. The simple answer is that nearly everyone but the insurance industry is concerned with the present value of your home, not what it would cost to replace.
As an independent insurance agent it’s my job to make sure you’re properly protected. An important component of that is providing the proper amount of coverage. The concept of most property or home insurance is to restore it to its condition prior to your claim. Consequentially, if you have a fire, tornado, or other catastrophe, your policy needs to have enough coverage to rebuild all or a portion of your home.
The cost to rebuild can be significantly higher than the original construction cost. When rebuilding, you will have to add in costs for demolition, debris removal, as well as reconstruction. Additionally, if your property was built as part of a development, the builder may have already had their equipment on-site. Hauling excavation and other construction equipment to a site doesn’t come cheap.
Everything from location to square footage and type of materials goes into calculating the replacement cost of a property. Clients will at times seem confused when I ask them numerous details about their home. Many haven’t had to think them about it since it was build or last remodeled. Contrary to their belief, it’s not because I’m nosy, but calculating what it may cost to rebuild similar to the way a contractor would do.
The key is to trust your insurance agent. Many times they will know what you need before you do. Our questioning is not in an effort to increase your premium or earn a higher commission but to make sure your policy will do what it’s intended to do. Being honest about your insurance agent can save you thousands of dollars.
6 Do’s and Don’ts of Property/Home Insurance
- DO be honest with your insurance agent.
- DO buy coverage on a guaranteed replacement cost basis if it’s available.
- DO call your insurance agent if you make changes or improvements to your property.
- DON’T forget about changes in building code that may impact the cost to rebuild.
- DON’T purchase a policy that provides coverage on an actual cash value (ACV) basis.
- DON’T use an appraisal to compare values with your property insurance.
There are several free options online to help you calculate your own replacement cost estimate such as www.building-cost.net. But, use these with caution as their material and labor costs may not be current. Independent insurance agents generally have access to the best, most up-to-date tools to provide you with a policy to fit your needs.