Why is Home Replacement cost so important?
Imagine going through a catastrophic event and your home is in ruins. After you deal with your immediate safety needs, you contact your homeowner’s insurance company. Then you begin the claims process. The adjuster comes out, takes photos, and gives an estimate for the repairs to your home. Only then you find out that you have to pay for several thousand dollars’ worth of repairs. How did this happen? You didn’t have at least 80% home replacement cost.
Home replacement cost is designed to cover the cost of repairing or replacing your home should a catastrophic event arise. However, home replacement cost is determined by your home’s cost to replace it, not the amount you purchased it for or the amount you owe on your mortgage. Let’s say you purchased your all-brick home for the bargain price of $200,000, but the replacement cost for the home is $300,000. If you elect to insure it based on the amount of your mortgage, $200,000, will you be able to repair or rebuild it for that amount? Probably not. Instead, you would need to insure it for the home replacement cost. This way you ensure you have adequate coverage to replace or repair your home.
Homeowners 2, Homeowners 3, and Homeowners 5 are covered on replacement cost if insured 80% to 90% of the replacement cost at the time of loss. This is why it is important to review your coverage at your renewal date. So in the example above, the home would need to be insured at least $240,000 or $270,000, depending on the home insurance policy.
What happens if you don’t insure your home at least 80% or 90% of replacement?
Most insurance policies will not fully cover the cost of damage done to your home. This is why it is important to insure at least 80% to 90% of the home’s total replacement cost. If you elect to purchase homeowners insurance at less than 80% or 90% of your home’s replacement, your insurance company will only reimburse you proportionate to the minimum coverage you should have purchased.
Am I Covered?
If you have done any of the following, contact your insurance agent to make sure your home is covered for the correct amount.
- Have an old insurance policy that just renews year after year
- Remodeled your kitchen or bathroom
- Added square footage to your home
- Made other improvements
Because these improvements add value to your home, your insurance coverage should also be evaluated for changes in the total replacement cost. In fact, it is a good idea to sit down with your insurance agent annually to discuss any changes to your home’s replacement cost and insurance coverage. When it comes time to make a claim, you will be glad you did.
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