Underinsurance: Is your home covered for all it's worth?
A home is the largest investment most people make in their lifetime. About two out of every three homes in America are underinsured. The average underinsurance amount is about 22%, though some homes are underinsured by 60% or more. This means millions of American homeowners are at risk of major financial loss should a disaster ever affect their home. Homeowners in these unfortunate situations find themselves responsible for tens of thousands of dollars of unexpected out-of-pocket costs to rebuild their house. Many of these homeowners are financially unable to rebuild a house like the one they had prior to their loss.
Reconstruction cost is what it would cost to rebuild your house from the foundation up with materials of similar kind and quality.
No. Reconstruction costs for your home may differ considerably from market value, particularly for older homes. Market value is what a willing buyer would pay for your home, including the lot. Location is a major factor in determining market value. Homeowners should also not assume that coverage matching their mortgage balance is sufficient to rebuild their home. The amount of insurance you buy should be based on rebuilding costs, not the selling or purchase price of your house.
- Access to your home site is limited because of trees, lawns, other homes and fences. Sometimes building code changes that occur after the initial build.
- Inflation is generally greater for building materials than other commodities. Older homes may need unusual materials that may be expensive to locate or duplicate.
- In a partial reconstruction, there is also extra cost in matching and aligning the undamaged part of the structure with the reconstructed part of the structure.
- In partial loss situations, removing the undamaged contents to put elsewhere for safekeeping.
- New home builders schedule their work for a building season and work most efficiently in a factory-line approach, which saves on both labor and material costs. Your reconstruction would be a custom job for them.
- There are more new build contractors than reconstruction contractors. With an easier task of building a home and a greater supply of those doing it, new build contractors charge significantly less for a job than a reconstruction contractor does.
- If the damage to the home is as a result of a catastrophe or at the same time as a catastrophe, demand surge pushes the price higher for labor and materials for all construction.
- Extra costs to tear out damaged materials or demolition and debris removal.
- Repairing a partially damaged home often means working from the top down, while new construction is usually from the ground up.
Remember when you updated your master bath? Or maybe added on a new deck? And, don't forget the kitchen remodel. Millions of Americans have taken advantage of near-record low interest rates and mortgage refinancing in recent years to upgrade their homes. According to one study, nearly 40% of those who have significantly remodeled their home have not updated their homeowners insurance or weren't sure if they had done so.
Let your agent know if you have remodeled or even made improvements to your home so your home is better protected. It's a good idea to contact your agent before or shortly after a renovation begins, rather than waiting until the work is complete.
Most policies only cover the current value of personal possessions, such as clothing, furniture and appliances. For example, the current value of a 5-year old TV is less than its original purchase price. The current value will not be enough to cover the cost to replace items with new ones. You should consider buying optional replacement cost coverage for your personal belongings, then your damaged or stolen possessions can be replaced with new. After all, wouldn’t you rather replace that 5-year old TV damaged by lightning with a brand new TV?
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