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Does Home Value Affect Homeowners Insurance?

Written by Ilyce Glink on February 4, 2013 in Insurance  |   8 comments

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…

homeowners-insurance-home-value

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.

8 comments

  1. Will says:

    don’t change insurance companies if you have an older home that has been insured with the same company for years. If the newer company inspects the home they may find that updates need to be made to the home to allow them to insure it. This may lead to you not being able to get insurance until the upgrads have been made. The previous insurance company may not take you back either because their policy may have changed over the years. How do I know….I changed insurance companies thinking I could get a better rate and then canceled my previous company before the new insurance company did a onsite review of my property. The new insurance company said they would not be able to cover my property until I had the electrical and plumbing updated. The previous company I was with also said since I had canceled them I would need to also complete the same updates before they could reinsure me. GET all the facts before changing insurance. Get the property inspected by the new insurance company before closing the deal. If not you may be left with just a couple of months to make updates and more money out of your pocket for a small savings per month on insurance.

  2. EFX Moderator, EM says:

    Will, you’re right that it’s important to know your options before changing insurance companies. You also want to prevent any gaps in insurance coverage just in case. Thanks for posting.

  3. Thomas O says:

    My insurance replacement cost according to insurance company’s cost estimator was $2,226,000 and the quality was listed as good.

    the appraiser in a refinancing listed the cost at $848,000 before a large deduction of $168,000 for depreciation and a net cost of $680,000 and ignored that the property was newly renovated new roof etc. .That is the appraiser is either 30% or 35% of the construction expert estimate. The appraiser low balled and even excluded nearby comps and instead choose far way inferior properties.

    • Anonymous says:

      We recently did some major upgrades. I called to advise our carrier. They only wanted to know if we added square feet. I advised them of the dollar amount of the upgrades and basically got blew off. We have replacement coverage. Our basic coverage remained the same but they added ” additional ” structure coverage. Still miffed haven’t ever seen an agent in 12 years.

  4. Oregon dan says:

    We purchased a home In Florida . Our current insurer in Oregon doesn’t sell homeowners insurance in that state. I contacted the agent that previously insured the home. I also checked around a couple other insurers. I got basic quotes, they all included hurricane and required flood coverage. I was ready to purchase Insurance . Wait. I needed a “four point” inspection. Had never dealt with that in Oregon, in fact our agent has never been to our residence. So, I used Angie’s list and found a reputable inspection agent . Four point includes, electrical , plumbing , structure , and roof/wind mitigation . There are 2 listed items that needed repair, electrical and 2 rafters that had been cut ( small pieces ) to run AC in attic. I can’t even get liability , it’s all or nothing. I’m now getting the work done and hopefully insurance soon. I did a lot of ingestion before the purchase, not one of the insurance agents mentioned the inspection requirement until it was time to actually purchase insurance.

    • EFX Moderator, EM says:

      You’re right, some insurance companies will want to an inspection. It can be for any number of reasons. It sounds like you’re going through the steps correctly. I know you already found an insurance agent, but you can review these steps to make sure you found the right one for you. Thanks for posting and good luck.


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