The number one task you must do today is: Review your homeowners’ policy. As I speak to new clients and ask them about their existing home insurance policy, I now understand how a recent study done by a recognized insurance consultant firm found that 2/3 of Americans under-insure their home. While another survey found that 50% of American homeowners do not have a clear understanding of their home insurance coverage. Meaning they do not know the A, B, C & Ds of their policy (Coverage A, B, C & D).
Most consumers believe their policy limits are based on the real estate value of their home, rather than the replacement cost of the physical structure. A question I hear asked is, why do I need so much insurance if the value of my home has plummeted? The assumption that these two numbers are tied together causes people to think they are paying for coverage they don’t need.
People must recognize that market values are based on factors such as locations, condition of neighboring properties, prevailing interest rates, local market conditions and even property taxes. None of these influences what your insurance really covers: your home’s replacement cost. The cost to rebuild your home exactly as it is now, in its current location, and using the same materials and workmanship. Despite a severe economic downturn, the cost of building has shown no signs of decline.
A big misconception is that new home prices reflect the cost to rebuild. Reasonable assumption, but not true. Rebuilding a home is almost always more expensive than building a comparable new one. Demolition and removal of a destroyed home must occur before rebuilding even begins, local ordinances often place regulations on demolition that can increase expenses and builders can’t buy materials at volume discounts when working on a single home.
The reality is that some people buy their policy and never look at it again. I recommend that you review your insurance coverage at least every other year, but it’s especially important to adjust your policy when you make improvements like adding a deck, a bathroom, or updating your kitchen.
The value of your insurance is not as much about the price as it is about protecting your assets. You worked hard for what you have, and protecting your family’s financial security is just the other half of the equation. So, by being proactive you can influence both sides and have the peace of mind you deserve.
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