A home is the largest investment you will probably ever make.
And according to Nationwide, about two out of three every American homes are underinsured. The underinsurance amount is typically 22%. This means that millions of people would suffer a major financial loss if their home was destroyed. Americans who find themselves in this predicament may have to pay thousands of dollars out of pocket to cover damages or may not be able to rebuild due to financial constraints.
Don't find yourself in this predicament.
How do rebuilding costs affect my insurance?
What is my home’s replacement cost?
The replacement cost of any item is the current price of replacing it with another item of the same kind and quality. The replacement cost of your home is the price of rebuilding it to its current specifications and standards if it is completely destroyed.
Why does an accurate replacement cost estimate matter?
An accurate replacement cost allows you to obtain the right amount of insurance coverage. If you don't have enough coverage and you have to replace your home you could be stuck with a hefty bill.
Let's say you have a $350,000 limit on your dwelling and a $100,000 limit for personal property. Your house catches fire and the blaze spreads to your custom detached garage that you added two years ago. Everything is destroyed: The insurance company writes it off as a total loss.
Will $350,000 be enough to rebuild (using today's prices for materials)?
- Consider everything it will cost to rebuild your home (the roof, siding, lumber, nails, gutters, flashing, insulation, windows, deck, etc.). Then consider the internal workings of your house like the walls, crown molding, flooring, carpet, floorboards, paint, built-ins, HVAC, boiler, generator, water heater, whole-house dehumidifier or water filtration system. Can you build a new custom garage, too? Inflation is at an all time high, so there is a very good possibility it's going to cost you more than $350,000 to rebuild what you once had.
Now ask yourself again: Will $350,000 cover the cost to restore what you had (using today's pricing for materials)?
- When you reach your insurance policy limits, the money stops. Period. You may have to forgo the custom reclaimed wood flooring or solar panels you had before the fire, just for the sake of getting a roof over your head. Either that or you're paying out of pocket. And who wants to pay twice?
- Other structures include limits that equal 10% of your home's coverage limit. Will $35,000 cover the cost of your fully insulated two-car garage with a woodshop? You might be disappointed if you end up with a drafty single-car garage instead. Or even worse, with today's prices, a carport.
Top off your total loss with a list of items needed to replace everything in your home.
Will a $100,000 limit on personal property be enough to replace everything you own?
- Consider rugs, drapes, furniture, clothing, electronics, jewelry, collectibles, artwork and appliances. (A high-end kitchen could quickly deplete an entire $100,000 limit, all by itself. I mean, have you seen the current cost of countertops?!)
Ask your insurance professional to help you decide on the reimbursement value and limits that are right for you.
How Do Rebuilding Costs Affect Your Insurance?
Replacement value vs Market Value
You might think it's enough to insure your home for market value (the cost people are willing to pay for your home), but the replacement value (the cost to rebuild from the ground up) of your home may far exceed its market value. Your home's market value today could be quite different next year. The cost of materials used to rebuild your house is likely a steady increase year-over-year. Your replacement cost is mostly driven by the price of materials and labor.
If you took two identical homes and set one near a popular beach and another in a modest suburb about 50 miles away, the market value of the beach home would probably be considerably higher than the other one. However, their replacement costs would be nearly the same.
Some homeowners policies include inflation guard (usually 2% to 4%) but not all. Check with your insurance professional to verify that you have inflation protection. Even if you have inflation protection you will want to revisit this. The price of lumber alone has tripled in the last two years, thus the price of your rebuild has greatly increased.
How Do I Calculate My Replacement Cost?
You truly won't know your replacement cost until it's time to build, but there are some steps you can take to come up with an accurate estimate.
The purpose of insurance is to make you whole again or put you back in the same type of house you had before the loss. To protect your budget from risk liability exposure, you should itemize, evaluate and determine the value of your home upgrades, materials, personal property and contents.
You can start to get an idea of your liability by creating a home inventory. Make a note of the contents as well as the materials used to build your house. Think upgrades, collectibles, construction materials, electronics, clothing, furniture, appliances – everything.
Your insurance agent can help you with this, but keep in mind, the accuracy of your replacement cost is only as accurate as the information you provide!
Information about your home that can determine your replacement cost:
- Type of foundation (crawlspace, basement, etc.).
- Type of construction (frame, masonry, masonry veneer, etc.).
- Roofing materials and type of roof (gabled, flat, hip, etc.).
- Siding materials and type of siding.
- Is the home built on a slope, and, if so, how steep is the slope?
- Total living area, in square feet.
- ZIP code.
- Number of stories and nonstandard wall heights, if any.
- Interior features and finishes, including walls, flooring and cabinetry.
- Age and type of heating and air-conditioning.
- Year built, and, if applicable, year when last renovated.
- Garage size and type (attached, built-in, etc.).
Knowing your areas construction costs can also help when determining replacement costs.
When do I need to update my insurance?
1. You've renovated your home.
2. You've invested in a security system or upgraded your security system.
3. You recently purchased something of value.
Lenders interests and your interests: a tale of two liabilities
In your mind, the purpose of insurance is to protect you and your belongings and to help you out in a disaster. The mortgage lender's interest is to protect their original investment, which is the outstanding loan on your home. Unless you have no mortgage, your home is insured as required by your lender. But there's a good chance that the level of protection you chose in order to buy your house doesn't adequately protect your liability risk exposure today.
Your home insurance should cater to the sweet spot that meets both interests:
- Coverage to get your house structure rebuilt.
- Coverage to replace your belongings, rehouse you while they rebuild, (who wants to live with their in laws?) and finally get your home back to the way it was before the event
Keep in mind that homeowners insurance offers protection that goes beyond your home and covers your personal liability exposure, too. That alone might be worth a call to your insurance professional.
Deciphering your policy
Understanding your policy (I know, fun stuff!) is your first step in ensuring you have enough coverage.
Start with your declarations page
Your declarations page summarizes your homeowners coverage, and it appears on the first few pages before the contract language. The declarations (or "dec") page lists your coverage types and limits (the maximum amount the insurance company will pay to you in a covered loss), such as these basics:
- Dwelling (coverage A) protects the structure, like your roof, flooring or other materials. This should match your replacement cost.
- Other structures (coverage B) protects things not attached to your home, like a fence or shed
- Personal property (coverage C) protects your personal property and moveable things in your home such as appliances, clothing, jewelry or electronics due to a covered peril
- Loss of use (coverage D) reimburses your expenses if you need to live elsewhere after a covered peril
- Personal liability (coverage E) helps with property damage and bodily injury claims made by other people that you're legally obliged to pay
- Medical payments (coverage F) helps with medical expenses to other people for bodily injury that happened while on your property
You might have more (or less) coverage than appears on your declarations page, so make sure to verify the policy with your insurance professional.
Other ways to cover your homeowners risk liability gaps
Now that you've done your homeowners inventory, ask your insurance professional about ways you can close the liability gap and insure against loss. Here are some options to consider:
- Additional living expenses (ALE) coverage helps out if you're forced to live somewhere else while your home is rebuilt or rehabbed. Consider the cost to continue living in your area, especially if you have school-aged children.
- Building ordinance or law protects you if a (covered) peril damages parts of your home and the city forces you to upgrade the entire house to code.
- Riders or floaters cover specialty items like jewelry, computers and silverware (generally up to $2,500).
- Collectibles insurance (scheduled property endorsement) covers high-ticket items like artwork, designer handbag stashes, antiques or other collectibles.
- Other structures covers anything not attached to your house. Think about increasing this coverage if you've got some stylish outbuildings or elaborate fencing.
- Personal liability usually covers up to $100,000, but you might want to go higher to protect yourself from footing the bill for a lengthy lawsuit.
- Extended replacement cost is another way to handle inflation. You can increase your home's replacement value up to 50% over the guaranteed replacement cost to rebuild; this is especially useful if you're faced with price gouging after a natural disaster.
- Sewer backup covers you in case of a sewer line or sump pump backup.
- Flood is a separate line of insurance that you can buy. Most floods occur outside identified flood plains and can happen anywhere (snow melts or flash rains, for example). Anyone is vulnerable to this costly liability.
- Earthquake is available as a separate line of insurance. Earthquakes can occur anywhere, not just in California. If an earth tremor structurally damages your house, your budget might get rocked, too.
- Comprehensive (H05 form) offers broader coverage than a standard homeowners (H03 form) policy, such as coverage for lost or misplaced jewelry instead of theft only.
- Personal umbrella coverage kicks in when you hit the limit on your policy. If you have home and auto policies, an umbrella will open over either policy when it's reached its limit.
Would you like to review your policy? We'd be happy to help! Give us a call or email us!
Blue Ridge Risk Partners is a top 75 independent insurance agency in the United States. With 21 offices through Maryland, Pennsylvania, and West Virginia and access to hundreds of carriers, we are able to meet your unique insurance needs.