Did you know? According to this CBS News report nearly 60% of homes are underinsured.
What does underinsurance mean?
Within every home insurance policy there are coverage limits reflecting the maximum amount the insurance company will pay – whether for the dwelling, other structures on the premises, or personal property.
Coverage limits may be found on a home insurance policy declarations page – the front page of the policy specifying the time period of coverage, who is covered, what is covered, coverage limits, and premiums.
This article focuses on dwelling coverage – the amount the insurance company would pay to rebuild your home and any attached structures.
The limit of dwelling coverage on your home insurance policy should correspond to the actual cost to rebuild your home using the same type and quality of construction materials. Underinsurance would be a situation where the amount of dwelling coverage is less than it would actually cost to rebuild your home.
How does underinsurance happen?
When you initially purchase a home insurance policy your insurance agent should assist in calculating the cost to rebuild your home and, whenever possible, provide a policy insuring your house for this amount.
The replacement cost of any home will likely be different than the purchase price or market value, which reflects market factors including the age, condition, location, and overall desirability – to a buyer – of the home. A capable insurance agent will calculate the cost to rebuild your home using information you provide about the square footage, features, and construction materials and may also review listing information, county records, and complete an on-site inspection.
After you purchase a home insurance policy the insurance company will typically increase the dwelling coverage each year based on regional increases in construction costs. While these annual increases are intended to keep pace with building costs over time the results can vary resulting in your home potentially being underinsured (or even over-insured). For this reason it’s a good idea to review the cost to rebuild your home and your insurance coverage at least once every 3 years.
The more common way underinsurance situations happen is when homeowners make additions or improvements to their home and neglect to inform their insurance company. It’s a good idea anytime you’re undertaking a sizeable renovation – whether upgrading a kitchen, finishing a basement, or adding other living space – to call your insurance agent.
How do I confirm how much it would cost to rebuild my home?
If you want to get a good idea of the cost to rebuild your home the Building-Cost.net website offers a free, online calculator that doesn’t require providing an email or any other contact information, is easy to use, and takes less than 10 minutes to complete. I tested the calculator with my own home and the results were within 1% of the valuation I calculated using advanced industry replacement cost software programs.
Your insurance agent should also be able to review and update their replacement cost calculation then furnish you with a copy of their estimate. You should review any replacement cost estimate to confirm the square footage and features are accurate, especially as some software programs make assumptions about features based on the age, style, and size of a home.
Why is properly insuring your home important?
It’s important to make sure your home is properly insured so that, in the event of a total loss, you have adequate funds to rebuild your home using the same type and quality construction materials. It would be quite distressing to discover, after suffering a catastrophic loss to your home, that your insurance coverage isn’t enough to pay the full cost to rebuild!
Furthermore, within the terms and conditions of most home insurance policies there is usually a provision that penalizes you if, at the time of a loss, the amount of insurance is found to be less than 80% of the replacement cost.
Is there anything else I can do to make sure my home doesn’t wind up being underinsured?
Yes! When you purchase a home insurance policy you may also be eligible to add Guaranteed Replacement Coverage to your policy. This optional rider alleviates worry whether your home insurance is keeping pace with construction costs by transferring that burden to the insurance company.
With Guaranteed Replacement Coverage the insurance company agrees, providing the home is initially insured at 100% of the replacement cost, to pay the entire cost to rebuild – even if that cost exceeds the stated limit of coverage. There is still a maximum payout, typically an additional 25% – 50%, above the stated dwelling coverage. There is also customarily a provision requiring you notify the insurance company of any changes that increase the replacement cost of your home by more than 5%.
Even with those stipulations Guaranteed Replacement Coverage is a worthwhile option to significantly reduce the possibility of your home being underinsured.