My Home is Worth What?

I’ve been asked numerous times, “If my home’s current market value is $300,000.00, why then am I having to insure it for $400,000.00?”  Consequently, I’ve created my first blog with an explanation that just might help understand what seems to be an inflated home value, simply for the purpose of inflating the cost of a homeowners insurance policy.

First of all, determining the price of a policy involves a few more criteria than just the perceived value of the home.   In general, what concerns the insurance company are things like:

  • Residence Type (Primary, Secondary, Rental)
  • Protection Class (Exposure to fire and fire suppression method)
  • Year Built
  • Construction Type
  • Age of the Main Systems (heating, plumbing, electrical), and when were they last upgraded, if at all
  • Type of Roof
  • Number of Fireplaces and Type
  • Square Feet
  • Number of Stories
  • Type of Garage
  • Alarm System
  • Interior Sprinkler System
  • Trampoline
  • Dogs (breed)
  • Loss History

As you can see, insurance companies are not too concerned about market value, because if a catastrophe happens and the home is totally destroyed (by a covered peril; e.g., fire), it will be their responsibility to pay to rebuild it, and do so at the current construction costs.  Simply put, let’s say the size of the home is 2,000 square feet, and, taking into consideration all of the above, the cost to rebuild it is roughly $200.00 per square foot (per the insurance company’s cost calculator), then the appropriate replacement cost value, or Coverage “A” on a homeowners insurance policy, will be approximately $400,000.00, and the policy will be priced accordingly.  Coverage on the policy for Other Structures, or Coverage “B,” and Personal Property, or Coverage “C” will then follow per a default percentage of Coverage “A.”

Some tips for lowering your homeowners insurance costs can be found at 12 Ways to lower your home owners insurance cost  published by the Federal Citizen Information Center.