Over the last four years, the housing market has been through a major overhaul—and not one that results in homeowners realizing significant gains in their home values. A recent USA Today article discussed the fact that home prices will likely continue to fall nationally throughout 2012. That means that if you own a home and it hasn't already fallen in value from the time you purchased it, it still may this year. As a home owner with a mortgage, this is probably a scary prospect and it may leave you wondering exactly how much your home’s assessed value has to do with your home insurance policy limits. Surprisingly, the answer is very little.
The Purpose of Home and Flood Insurance Limits*
Insurance policy limits give insurance companies a parameter for the claims they can expect to pay. Just as you must choose a deductible for your policy, you must also choose a limit that designates the maximum amount your insurer will pay for a claim against your policy.
When you set the limits on your home and flood insurance policies, you should not base this number on the assessed value of your home. Instead, your limit is meant to reflect the replacement cost of your home should it become totally destroyed in an insurable incident. Rebuilding costs are based on entirely different factors than your appraised value. In fact, the cost of materials and labor to rebuild your home may exceed the property value this year and beyond. That means that as your home’s value declines, you should not make any changes to your insurance limits based on that drop in value.
When to Adjust Limits
Property value is a relatively straightforward number, but estimating rebuilding costs is a little more difficult. Many national and worldwide economic events can affect the cost of rebuilding your home. As oil and gas prices rise, it can be more expensive to produce and transport the materials used in home construction. Additionally, as demand rises for both labor and supplies, the price for each can increase. Changes in local building codes can create another increase in rebuilding costs from year to year; as these codes become more conservative they may require more specialized materials in home construction.
Some of your own choices might also affect rebuilding costs. For instance, if you want your home rebuilt with sustainable materials and a focus on green energy measures, then you may need a special rider that allows this additional expense to be supported by your policy and not your wallet.
It's a good idea to discuss average rebuilding costs in your area with your agent when you conduct an annual insurance review. This is the best way to learn when it’s appropriate to increase your limits.
Contents are different from your main dwelling’s structure. It can be possible to understand when to raise and lower contents limits a little more easily. For example, as you buy new furniture and upgrade electronics, you might realize that an increase is in order.
Depending on the type of policy you have, you may want to lower contents limits as the value of your furniture, electronics, clothes and other items declines. When your policy pays actual value for damaged contents, then your insurer will consider depreciation and fair market value when determining your benefits. Fair market value is generally described as the amount of money one individual would pay for something if they knew everything about the item and were not compelled to decide quickly because of a deadline.
However, if your policy pays replacement value for your contents then an increase in limits may be may be necessary as the cost of comparable replacement property rises, often for the same reasons as the cost of rebuilding rises.
We are here to help you discover the best policy design to protect your home and property. We conduct annual reviews to help ensure that your policy is relevant from year to year and we work with you to create a policy that fits in your budget without sacrificing benefits. When you’re ready to begin your home insurance planning give us a call.
*Always remember that home insurance policies do not provide coverage for damages caused by floods. If your home is in or near a flood zone, please give us a call to find out more about how our flood insurance policies can help you.
For more information about Grand Prairie home insurance, give GetAPolicy a call at 888-748-1930.