Insurance value vs. market value

[mamacatnv]

I'm not sure if I titled that correctly but here is the question.

Yesterday, I was speaking with our insurance agent and I asked her if we needed to look at how our home was valued and insured based on the dramatic decline in home values in our area.

She said that the cost to rebuild my home per some schedule that she whipped out of her computer came to $239,000 and that we should keep our coverage where it is.

Now, 2 years ago when my home was "valued" at $350,000 the cost to rebuild was $239,000 and that is what we were insured for. Now, the "value" of my home is approx. $195,000. BUT my agent says I still need the $239,000 in coverage.

I'm confused, my house and the land would not sell for what my agent says it would cost to rebuild the house alone. She says that contractors are gauging and thus keeping the per sq. ft. price inflated.

It does not make a big difference in my annual premiums, I just thought it was strange. Is it strange? I could buy bigger, better and newer for less than the cost to rebuild my current home.

 

[DebbieB]

Most homeowners insurance policies are based on replacement cost, the cost to rebuild the home back to its original condition. The cost to rebuild would not have changed much from 2 years ago. Otherwise some people would underinsure and the insurance company would not be collecting enough premium to cover the losses for the group.

 

[Anewman]

I could buy bigger, better and newer for less than the cost to rebuild my current home.

You can buy "newer" than a REBUILT home?

 

[golfgal]

Most homeowners insurance policies are based on replacement cost, the cost to rebuild the home back to its original condition. The cost to rebuild would not have changed much from 2 years ago. Otherwise some people would underinsure and the insurance company would not be collecting enough premium to cover the losses for the group.

I agree, your insured value has nothing to do with the market value of your home. It is the cost to replace your home and since building materials are up in price if anything your replacement cost should have been higher then it was 2 years ago. DON'T skimp on your replacement cost of your home or you will be very sorry if you do need to replace your home.

 

[Colleen27]

It does not make a big difference in my annual premiums, I just thought it was strange. Is it strange? I could buy bigger, better and newer for less than the cost to rebuild my current home.

That isn't unusual at all. While the housing market has taken quite a dive, that really doesn't have much effect on the cost of rebuilding.

One thing you aren't thinking about is demolition and cleanup costs... We're in the middle of dealing with all of this because my mother's house recently burned and I've gotten quite the crash-course in insurance. The cost just to demolish what was left of the house and secure the foundation came to nearly $20K. If she had opted not to rebuild, there would have been additional costs involved in getting the lot ready for sale. Draining, drying, cleaning and de-smoking the basement was a significant expense too. The actual rebuilding will come to roughly 3/4 of her structural replacement coverage; the other 1/4 covered the necessary prep work.

 

[mamacatnv]

You can buy "newer" than a REBUILT home?

Yep - scary huh! I could currently buy bigger, newer and or brand new and in a better area for the $239,000 that my insurance company says it would cost to rebuild my home based on the current conditions in the housing market here.

 

[Anewman]

Yep - scary huh! I could currently buy bigger, newer and or brand new and in a better area for the $239,000 that my insurance company says it would cost to rebuild my home based on the current conditions in the housing market here.

I would assume that if a home is REBUILT because it was destroyed, it would be considered brand new.

 

[mamacatnv]

That isn't unusual at all. While the housing market has taken quite a dive, that really doesn't have much effect on the cost of rebuilding.

One thing you aren't thinking about is demolition and cleanup costs... We're in the middle of dealing with all of this because my mother's house recently burned and I've gotten quite the crash-course in insurance. The cost just to demolish what was left of the house and secure the foundation came to nearly $20K. If she had opted not to rebuild, there would have been additional costs involved in getting the lot ready for sale. Draining, drying, cleaning and de-smoking the basement was a significant expense too. The actual rebuilding will come to roughly 3/4 of her structural replacement coverage; the other 1/4 covered the necessary prep work.

Well that makes a lot of sense. Hadn't thought of the demo costs and getting the lot ready to rebuild on etc.

I know when housing skyrocketed we significantly raised the rebuilding base of our policy and now that it has dropped so much the base remains the same.

 

[mamacatnv]

I would assume that if a home is REBUILT because it was destroyed, it would be considered brand new.

Yes, you are probably correct (I guess it would depend on who was doing the work) ie certain builders have better reputations than others. However, it would be surrounded by older homes in an older neighborhood that perhaps may be less desirable than another area where "more house" could be purchased for what it would cost to replace current house.

 

[ZachnElli]

Do you ever watch Exterme Makeover: Home Edition? Just this last Sunday even, the family lost their home to a tornado and didn't have enough insurance to rebuild their house. It costs alot more to rebuild a destroyed house than to buy an existing in this market as a PP described in pretty good detail.

 

[barkley]

we are currently going through the initial stages of getting major damage to our home repaired. i am SO glad we have replacement value coverage-i don't want to think of what this is going to end up costing (when it was first presumed to be strictly cosmetic involving some minor drywall, spakling and repainting the tab was already over $5000.00).

it's important to have replacement costs in line with what contractors and such are charging these days-i know costs went up hugely around here because of the increased transportation costs for supplies.

i'm also very thankful that we carry insurance that provides housing in the event our house in uninhabitable. gotta figure-even if the house no longer exists you're still on the hook for the mortgage. i don't know many people who could swing a mortgage plus temporary lodging expenses for up to months at a time

 

[OctMtnWoods]

Think of it this way. It would cost the same to build your house (material and labor) no matter if it were located near the ocean or near a smelly factory. You are only insuring the material and labor. Not the land or location.

Lumber prices did go up though. So an insurance review was a good idea.

 

[Colleen27]

Well that makes a lot of sense. Hadn't thought of the demo costs and getting the lot ready to rebuild on etc.

I know when housing skyrocketed we significantly raised the rebuilding base of our policy and now that it has dropped so much the base remains the same.

Several factors coincided there for a while to really drive up building costs at the same time housing went through the roof, and demand was really the least of them. Lumber and other materials jumped in price because of the super-active hurricane seasons in 2004-5 and haven't really come down. And then gas prices went through the roof, which has a HUGE effect on contractors (who usually drive trucks for business reasons), suppliers, material delivery rates, and heavy equipment operators, all of whom are involved in rebuilding.

Besides, it is always better to have a higher limit than a lower one. The difference in premiums is usually minimal, but the difference if you do need to rebuild can be huge!

 

[Andy B]

Think of it this way. It would cost the same to build your house (material and labor) no matter if it were located near the ocean or near a smelly factory. You are only insuring the material and labor. Not the land or location.

Lumber prices did go up though. So an insurance review was a good idea.

This is not strictly true, labour costs can vary as can some other costs such as costs caused by access to the site.

 

[RUDisney]

My last insurance agent insisted that I insure my house at a specific price. My DH is a lender and through the calculators that he had, the cost per sq. ft. of living space to rebuild was more than the agent was insisting that I purchase.

So, I went to another agent and (through the same company) was quoted a lower price, for more insurance, with a rider that would increase the payout should lumber, drywall, labor, etc., prices skyrocket. Basically, my house is insured for $450,000, but if it cost $700,000 at the time to rebuild, that is what would be paid.

I sleep better at night since we've bought that policy.

Oh, and we also bought an umbrella rider that insures us for $1 million for only $9 per month. That's also peace of mind for which I'm glad to pay.

I'd prefer to pay a little now and hope that we never use the insurance than to be scratching my head later wondering how we'll pay for a rebuild.

 

[golfgal]

My last insurance agent insisted that I insure my house at a specific price. My DH is a lender and through the calculators that he had, the cost per sq. ft. of living space to rebuild was more than the agent was insisting that I purchase.

So, I went to another agent and (through the same company) was quoted a lower price, for more insurance, with a rider that would increase the payout should lumber, drywall, labor, etc., prices skyrocket. Basically, my house is insured for $450,000, but if it cost $700,000 at the time to rebuild, that is what would be paid.

I sleep better at night since we've bought that policy.

Oh, and we also bought an umbrella rider that insures us for $1 million for only $9 per month. That's also peace of mind for which I'm glad to pay.

I'd prefer to pay a little now and hope that we never use the insurance than to be scratching my head later wondering how we'll pay for a rebuild.

Don't be so sure that your rider will go up that much. There is usually a percentage increase involved with the rider, usually 20%. Some agents will reduce the covered amount by 20% knowing this but then you are stuck if material costs go up and you NEED that extra 20%. You might want to read your policy to confirm that they would pay out that much more because I doubt that is true.