Studies show that nearly two out of every three homes are underinsured, indicating millions of homeowners throughout the nation are at risk of a major financial loss if their home is damaged from a fire, tornado, hurricane or another disaster.
When deciding how much to ensure your home for, people typically ask themselves, “What is the value of my home?” You may automatically look at your home’s market value and think it should be insured for the amount you paid for it. But, that’s usually not enough coverage.
Your home’s market value is the value determined by a real estate appraisal and is based on the economy, other nearby property values, housing availability in your area, your home’s condition and a number of other factors. Market value has nothing to do with how much it would cost to rebuild your home in the event of a total loss.
Since real estate markets fluctuate and can be difficult to predict, it is not recommended to ensure your home based on its calculated market value. Materials and labor may cost more now than when it was built, and special features that have been added over time could be more expensive to replace.
Your home’s insurance value, or replacement cost, take those variables into consideration in addition to fuel and energy costs, the cost and availability of skilled labor and changing construction codes and standards. Replacement cost determines the overall cost to repair damage to your home or to rebuild it from the ground up in today’s marketplace, using materials and craftsmanship of equal quality.
What does this mean for the average homeowner?
It means that just because the market value of a home may fluctuate, the cost to rebuild will not cost any less, should a disaster strike. Based on insurance industry data and statistics, it will most likely cost more to rebuild your home to the condition and size it was before the disaster.
As home remodeling continues to increase, it is very important for homeowners to inform their Farm Bureau Insurance® agent of the remodeling projects, square footage additions and other improvement ventures that may increase the value of the home. Many of these improvements, such as kitchen and bath remodels, involve expensive upgrades that need to be figured in when determining a home’s replacement cost.
Homeowners can reduce the risk of underinsurance by having a clear understanding of how much it will actually cost to rebuild their home. Consumer replacement cost calculators such as SwiftEstimator® or National Appraisal Estimator, provide a homeowner with a detailed estimate on the replacement cost of the home. The report is generated for a very minimal fee using the information provided by the homeowner and the same reconstruction cost data used by the insurance industry.
It is important for homeowners to realize that even if a home’s market value declines, the cost to rebuild a damaged home is unrelated because construction costs continue to rise. And remember: insurance premiums are not based on the current resale value of a home, but on the cost to replace it.
If you have a question about replacement cost or the current insurance value of your home, contact your local agent. We suggest regularly reviewing your home’s current replacement cost with your agent through an Annual Review in case you need to reevaluate your insurance to avoid coverage gaps.