Should You Insure Your Home Over Market Value?
Do you know how much home insurance coverage you have? Did you simply sign a contract with an insurer without knowing the details? This could cost you later. Many people select insurance based on the price they paid when buying the home. This is a mistake. Nearly all homes require insurance above market value. That is because it typically costs more to rebuild a home than it does to buy one. How does that factor into the amount of insurance you need?
While no one wants to believe the worst can happen to them, you should plan for it. Consider what may happen if a fire damages the home so much that there is no way to repair it. What would happen if repairs just were not possible? The insurance company works to pay you what they owe you, based on the coverage listed on your policy. That helps you avoid potential financial ruin.
Consider this scenario. A homeowner buys a home for $200,000. He or she purchases insurance at that rate. A few years later, a faulty wire in a wall causes the home to burn. Repairs are too extensive. The insurance company totals the home. At this point, the insurance company can cover the cost to rebuild the home or cut a check for the coverage you have.
Will $200,000 be enough? This may be the cost to buy your home. However, the cost to construct your home differs. Building the home requires permits, design teams, and sourcing construction materials. The cost of lumber is up. Worker shortages lead to builders to increase wages to keep their staff on the job. All of this adds to the cost to rebuild the home. That cost trickles down to you. Even if none of this happens, the labor and materials to build a home tend to cost more than the ability to buy the home on the market.
Work with your home insurance agent. Discuss what your options are. Most often, purchasing a replacement value insurance policy is best. This means the company works with you to rebuild the home with the same basic standards. They are not cutting a check and leaving you with nothing but the mortgage to pay.
Home insurance coverage does not legally have to be over market value. Your home mortgage lender wants to ensure it is enough to cover what you owe to them. Yet, for most property owners, the cost to rebuild must be a higher factor.