For the past five years, most homeowners have been watching their homeowners insurance rates go up, even as their homes drop in value. This has led some homeowners to wonder: If my home is worth less, shouldn’t it cost less to insure?
Unfortunately there is no insurance break on the horizon for homeowners, regardless of the market value of their homes. There is no direct link between insurance costs and the value of a home.
Insurance companies value homes differently than a real estate agent or tax assessor might, and market value isn’t a factor for insurance agents. Insurance companies calculate what it would cost to rebuild the same kind and quality as your home on your exact property, either as replacement cost coverage or actual cost coverage. The difference between the two is simply that actual cost factors in depreciation, while replacement does not.
Neither of these values takes into account market factors, such as your community building a new park nearby or the prices that comparable homes are selling for in your neighborhood. If your home’s value took a hit during the past five years, it’s not really relevant to your insurance company.
That does not mean, however, that the cost to replace your home has not changed. In fact, it probably has.
“It’s always a good idea to review your insurance annually,” says Loretta Worters, spokeswoman for the Insurance Information Institute. “While it’s true the market value of the home has no bearing [on your insurance coverage], the cost to rebuild can change.”
For example, the cost of construction and building materials may have changed over time. As a result, it may cost more to build your home now than it did when it was first insured five years ago. In the past year alone, construction costs are up 3 percent and building costs and materials have gone up 2 percent, according to Engineering News Record.
“There can also be changes in building codes, if you’ve upgraded a kitchen or added square footage to your home, such as a family room or a dormer,” Worters said. “So this can determine whether you have the right amount and type of coverage.”
You may find, based on these factors, that the value of your home has actually increased in the eyes of your insurance company. If so, you may need to upgrade your homeowners insurance coverage to avoid a situation where your insurance company writes you a check that doesn’t meet today’s costs.
Plus, in any insurance review, you may learn that you qualify for newly introduced discounts or savings, that you made safety improvements that actually lower your insurance costs, or that bundling insurance plans is a good option.
If your insurance rates do go up, consider making an extra-careful examination of your insurance policy and look around at other insurance companies. But remember: Saving pennies is not always smart with insurance plans. Make sure that you’re not sacrificing your long-term needs for the best bottom-line price.
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.
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