Did you know that homeowners insurance companies look at the value of your house completely differently than banks, mortgage companies, and even someone wanting to buy your house? Well, it's true! I’d like to discuss how it’s different and how it can affect the cost of your policy.
When you are getting a quote for homeowners insurance, more often than not the insurance company will come up with a value of your house for you. If you are getting multiple quotes from different companies, the value will most likely vary from company to company. This is because the insurance companies get something called a replacement cost estimation and, most of the time, each company will have its method of estimating replacement cost. These estimators use the construction information of your home to calculate the cost to rebuild your home, and then use that information to come up with your dwelling limit. This is vital to insuring your home properly!
Most people get confused about the insurable value of their house. They think that the insurable value should be the same as the market value, or how much they paid for the home. This is simply wrong. If your house were to burn down, the insurance company’s goal would be to build you a new, similar house. In order for them to do that, they need to know how much it would cost to build the house brand new. That is why they use the replacement cost estimators rather than the home's market value. This ensures that if something tragic were ever to happen to you home, you would have enough coverage to rebuild a similar home.
Having your agent do a replacement cost estimation on your home could end up saving you money. It is possible that the house could be over-insured, and if your agent finds that with a new estimation, they can lower your dwelling coverage, which saves you money! Be warned, it is also possible that your home is under-insured, and if a replacement cost estimation confirms this, I highly recommend you increase your dwelling coverage appropriately, which will cost you more money. (Boo!)
If you haven’t had your agent do a replacement cost estimation in the last few years, I definitely recommend it! It has the potential of saving you money on your policy, but more importantly, it could prevent you from being under-insured in the event of a terrible circumstance that destroys your home.