There seems to be this fear on either end of the insurance spectrum…no one wants to be underinsured, but no one one want to be paying for too much coverage either.
It’s a pretty delicate balance of comfort that we need to find when it comes to insurance. No one knows what might happen later today, let alone months or years from now. Finding that peace of mind when it comes to your insurance can be tedious at times, but it is always worth it.
I usually get a lot of questions when it comes to coverage limits, especially when I am meeting with someone reagarding home insurance. It could be a current client, or a first time home buyer that is learning things for the first time.
This blog post is going to focus specifically on the amount of coverage for a home or condo insurance policy.
While there a number of factors that come into play during a home purchase, and each situation is unique, I want to take some time to focus on three different numbers. Those numbers are the Appraised Value, the Market Value, and the calculated Replacement Cost (this is where the insurance comes in).
I want to stress at the beginning of this post that the majority of this information will be coming from the angle of an insurance agent. I am NOT a licensed home appriaser, nor a realtor. I did however make a couple phone calls to people I trust who are in these industries to gather some information about the process. Please keep in mind in regards to the Appraised Value and Market Value, the information is very basic.
For anyone who is reading this and in the process of purchasing a home, maybe even for the first time, you will want to consult with the professionals so you have an understanding of the numbers.
Take the time to read the appraisal after it is completed.
Ask your realtor about the community and neighborhood if you are unfamilar.
And take the time to sit down with your insurance agent to go through the Replacement Cost calculator if you have questions. It will help you to understand the process even more, and give you a comfort level for the amount of coverage you have on, most likely, your largest investment.
So let’s get started…
The Appraised Value of a home is determined by a licensed home appraiser who uses many different variables, including the the specs of the home (square footage, style, etc.) as well as comparable homes in the area, to determine what the home is worth. They also use recent home sales in the current real estate market to help determine the appraised home value.
Which leads to…
The market value of your home is dictated by the real estate market and home sales in your community. And this can vary greatly depending on what homes are selling for in your area.
Kearney, Nebraska for example is a town of approx. 30,000 people. Kearney is also surrounded by many smaller communities in all directions, which is great! Someone who is looking to purchase a home in this area can decide if they want to live in a larger community, or embrace the small town life!
I bring this up because the Market Value will most likely vary between a larger and the smaller communities. Two houses that are very similar in every aspect, will most likely have two different purchase prices depending on which community they are in. It’s true what they say…Location, Location, Location!
But just because the purchase price is different, doesn’t mean that the coverage amount, or Replacement Cost, will change.
The Replacement Cost of your home is the calculated amount of what it would take to replace your home in the event of a total loss. Essentially, it is the cost per square foot that a contractor would charge to rebuild your home as it stands now, if it were totally destroyed.
Insurance agents will use information that can be obtained from the county assessor, realtor, and even the appraisal to help determine the Replacement Cost. Info including, but not limited to, the total square footage, year built, type of siding, number of bathrooms, and style of the home are calculated to come up with the proper amount of coverage.
As an independent agent, we work with many different insurance companies, and each company we work with has a different calculator to determine replacement cost. For this reason, we will determine which companies offer the best coverage and most competitive rate during the quoting process, as well as determining the Replacement Cost. The fewer the surprises the better.
Typically, an insurance company will have little to no flexibility in the coverage amount after the replacement cost has been determined. So, when we run quotes and “Company A” determines that coverage should be $200,000, then that is the amount we need to run the quotes at.
Speaking strictly from an insurance standpoint, this can create some confusion and frustration for new home buyers, especially if the amount of their loan is much less than the coverage amount required by a particular insurance company.
Let’s take the example of Kearney and the smaller communities that surround it. Let’s say someone is house hunting in Kearney. They find a nice 1400 square foot home with a purchase price of $180,000. After doing some reasearch online and talking with their realtor, they find a very similar 1400 square foot home in one of the smaller communities, with a purchase price of $120,000. After doing some math to determine if the 15 minute drive each day is worth it, they decide to put in a bid on the home for $120,000.
One of the advantages of living in a smaller community can often be the cost of living. Having the opportunity to purchase this home for $60,000 less in the smaller community is awesome!
But the buyer needs to understand that Replacement Cost on this home, based on the square footage, year built, and other characteristics, is still closer to $180,000. And their insurance policy is going to need to reflect that.
Replacement Cost is replacement cost. The amount a contractor is going to charge per square foot to rebuild a home is not going to change dramatically, even if the home is in a smaller community. They are going to need to get building materials from somewhere, and if the local lumberyard can’t accommodate, they will need to be brought in from another town.
Education is huge when it comes purchasing a home. There are a lot of different things that need to come together to make it happen.
The values that are described here are just part of the process.
Kind of like packing and moving. That is also part of the process. I don’t have any advice for you there.
I just stick to the insurance stuff.