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Insure Your Home For the Correct Value
How much should I insure my home for?
One of the most difficult questions you will face when buying home insurance is the insurance value of your property. The correct value is based on reconstruction costs, not the price you could get for selling your property. Below are a few guidelines that should help you decide what is a sufficient amount of coverage.
There is no "average" amount of insurance that a home should have, because each situation is unique and can have many different factors determining reconstruction costs. However, a common method of calculating the amount of coverage is to multiply the square footage of your home by a replacement cost per square foot value. Most homes fall into the range of $65 per square foot (on the extreme low end) all the way up to $200 per square foot and more. Today, "most" homes are insured at around $100 per square foot. That is, however, an extreme generalization, and will depend on many of the factors below that you should use when calculating your home's reconstruction value.
- Evaluate The "Uniqueness" of Your Home. If your home is a tract home in a neighborhood where there are several homes that are exactly identical to yours, chances are it will be easier to replicate and thus the value you insure at can be a little bit less. On the other hand, if you live in an area where your home is one-of-a-kind, you might want to consider insuring your home for a little more.
- Evaluate the "Customness" of Your Home. If your home is a home with vinyl flooring instead of tile, formica countertops instead of granite, and not much molding or custom wood work, you can probably insure your home for less. If, on the other hand, you have hardwood floors instead of tile, upgraded appliances and fixtures, and quite a bit of custom wood molding, your home should probably be insured for much more.
- Evaluate Your Geographical Location. You need to do this for two reasons. First, if you are in an area that is remote or more difficult to get to, construction costs are typically much higher. Second, construction costs vary greatly depending on the part of the country you are in. Construction prices in Texas can be very different from construction prices in Los Angeles, California, for example.
- Evaluate How Much of the Property Value is in Land. Land is never insured with homeowners insurance, and thus should not be considered when coming up with the amount of coverage necessary for your home. It is important to remember, however, that debris removal needs to be included in your replacement cost.
- Understand that Replacement Cost for Your Home is Not Based On Current Real Estate Prices. In real estate, prices can rapidly go up and down. Most insurance companies thus don't base replacement cost on current market values, but rather construction costs. If you have your home insured for $200,000 and because of a real estate crisis your home is now only worth $100,000, it may not be in your best interest to immediately try to lower your coverage to the current sales market value.
- Understand and Accept Replacement Cost Estimators of Industry Professionals. You may insist that your home could be rebuilt for $85 per square foot, but if most companies are coming back insuring your home for over $100 per square foot, it is always in your best interest to err on the side of too much coverage rather than too little. If after explaining to an agent you believe the home should only be insured for a certain amount, and the agent still insists replacement cost is much higher or lower than you would like, it's probably best to accept the amount that the agent deems necessary. If it still really bothers you, look elsewhere for insurance. But make sure that the amount of coverage you get is replacement cost policy, or you may be sorry when trouble strikes.