Why should I insure my home for replacement cost?
Over and over again for the past 30 years, I have heard the complaint that the amount of coverage on my home on my homeowner’s insurance policy is way more than the home’s market value. Sometimes you insure even a newly constructed home for more than what you just paid! A seemingly excess amount of coverage is a valid concern because it seems a bit unethical to insure your home for more than it is worth.
Replacement cost coverage, when available, helps to protect your family’s financial security and the property values of your neighborhood and community. Here’s why:
1. The cost of reconstructing your home is more expensive than building it in the first place.
When the contractor decided to construct your home, they started with a clean slate…a piece of empy land. Everything is an “addition” to the process. After a fire or windstorm, the contractor has to remove damaged portions of the property before the “additions” can start. Contractors have told me that around 12% of the value of the additions to the home is the cost for the removal of the damaged portions.
So if your home is destroyed and it would cost $200,000 to build it, you should insure it for $224,000 to rebuild it due the cost of debris removal.
But there is another factor that weighs into the picture following a disaster. When a disaster strikes and a number of homes are damaged, the cost of building in that area is affected by supply and demand. If it is a really big occurrence such as a massive tornado or a hurricane, the price of building products increases.
This affected me personally when I was building my new home in the summer of 1992. Hurricane Andrew hit Florida and the price of all my building materials went sky high. What’s more, some materials were not even available. The shingles that I had priced for my house were not available for the foreseeable future. I had to ask the supplier…”O.K. what do you have in the warehouse?” and go with the more expensive 40 year shingles.
So you can see that having a disaster in another part of the country can affect the replacement cost of your home. Buying enough coverage is really important. The story in the insurance business that “I’ve never seen a totally destroyed house with too much coverage” is probably very true. Not enough coverage is generally the problem.
2. Many people can’t afford to or don’t want to finance the additional cost of completing their home repairs.
Can you imagine being on a fixed income or at the edge of what you can afford and being told that will cost an additional $40,000 to complete your home repairs? I can’t. After all, my life has just been turned upside down by the destruction that just occurred and now I have to deal with a mortgage loan!
Imagine that you are a retired couple and are skimped on your insurance coverage to save a few (and I mean a few) dollars and now you are having to take out a reverse mortgage on your home because you don’t qualify for a convential mortgage due to age and income. Your whole lifestyle just went out the window. It would have been better to have taken the reverse mortgage, used some of the money to pay the premium, and used the difference in income to enhance your lifestyle. Now, without adequate coverage, you have no borrowing power left in your home because it was all used up just to complete the repairs.
Imagine that you just lost your job, had a medical condition, or were going through a family emergency such as a divorce. How likely would it be that a lender would extend you money in that situation? NOT VERY!!! Adequate insurance coverage to complete your repairs is the only solution.
3. Replacement cost coverage protects the neighborhood’s values.
In 1991, the Oakland fires were a lesson to anyone that is a student of insurance history. See https://en.wikipedia.org/wiki/Oakland_Firestorm_of_1991 Thousands of home were destroyed by fire and inadequate insurance coverage was the headline in insurance journals across the country. What the articles were telling us is that homes were not being rebuilt even if the insured had adequate coverage because their neighbor’s homes were not being rebuilt. Can you imagine the unfortunate neighbor whose home was not damaged but now was staring at a neighborhood of concrete slabs? Who would want to purchase his home now? How many years would it take for their home’s value to recover to pre-fire levels?
That undamaged neighbors house was financially devastated by the fire in his neighborhood. If a vast majority of people had purchased adequate coverage, he wouldn’t have had to suffer the decline in value because the people would have rebuilt.
Imagine a massive tornado hits your community. Replacement cost is necessary to assure your community’s survival.
Call 806-798-7800 to buy your home insurance or visit www.hettlerinsurance.com for more information.