Can insurance protect against a decline in your home value?

By Michele Lerner Posted : 11/07/2011

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[Editor's note: The Home Value Insurance Company is no longer selling policies as of September 2012 .]

home value going downTumbling home values around the country have tormented homeowners in recent years, particularly those who have had to sell in a declining real estate market. In response to dropping home values, the Home Value Insurance Company recently introduced a "Home Value Protection" insurance policy that pays if you sell your home at a loss.

"Most people protect their home with hazard insurance in case of a disaster, but they have not had a way to protect themselves against their home losing market value," says Richard McCathron, executive vice president of the Home Value Insurance Company in Columbus, Ohio. "Housing markets are always uncertain and homeowners don't always know when they will need to sell, so this policy provides a way to insure their property against falling values."

The Home Value Protection policy, among the first of its kind in the U.S., is available to homeowners on their primary residence, not to investors. Currently, the insurance is available only in Ohio, but the Home Value Insurance Company plans to offer it in approximately 20 more states in 2012. The home value insurance should be available in every state within the next two to three years.

Once the insurance becomes available in your state, you can purchase an insurance policy at any time, regardless of how long you have owned your home.

Justin Krane, a Certified Financial Planner and president of Krane Financial Solutions in Los Angeles, says Home Value Protection insurance makes more sense in a declining market.

"If you think the market has bottomed, then you would not want to buy it," says Krane.

Some real estate markets, such as parts of the Washington, D.C., area, have been somewhat immune to price declines and other markets have already stabilized.

Deciding whether or not to buy this insurance also depends in part on how soon you intend to sell your property.

"You are spending money to insure against something that may never happen," says Krane. "On the other hand, some people intend to stay in a house for 10 years but end up selling earlier than expected. Peace of mind is worth a lot. It all boils down to the premium."

Your perception of the housing market's health also comes into play when considering home value insurance.

"The assumption a lot of people share is that we have hopefully hit bottom on home prices," says J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, D.C. "The fact that this insurance is being offered now makes me more hopeful, because insurance companies are not in the business of trying to help people. They are in business to make money."

Both Hunter and Krane agree that Home Value Protection could be a viable type of home insurance.

"It does fit the model of mitigating risk," says Krane. "If the premiums are cheap and someone can afford it, then it probably isn't a waste of money. Insurance is all about spending money to financially protect against a catastrophe."

Hunter warns that new types of insurance that lack competition from other providers tend to be overpriced.

"Nothing sells insurance like fear, so this is the perfect time to sell this insurance," says Hunter. "But homeowners should go slow and not act out of fear, especially when there's only one provider of this insurance. They need to really understand what they are buying."

How Home Value Protection works

McCathron says that Home Value Protection coverage costs approximately $20 per $100,000 of protected value. If you live in Ohio, you would pay about $40 per month in premiums for the average $200,000 home, he says.

Every policy is capped to cover a price decline of a maximum of 25 percent of the home's value. The annual policy is guaranteed to be renewable for 10 years as long as you pay the premiums. You can buy a new policy at the end of the first 10 years.

The maximum insurable home value is $500,000, although more valuable homes can be evaluated on a case-by-case basis to determine eligibility.

The two key elements of the Home Value Protection insurance are the initial insured value of the property and the price of the home when it is sold.

"The first step is for the homeowners and our company to agree on the current market value of the property," says McCathron. "If the home was purchased within one year of applying for the policy, we use the purchase price as the value for the policy. If the owners purchased the home more than one year ago, we use automated valuation models to determine the value. Generally we come up with a range of home values such as $192,000 to $210,000. The homeowners can choose to insure the property at the highest amount so they can lock in the increased value."

If you and the insurance company disagree about the current market value of the home, you can discuss it and try to come to an agreement. Or, you can choose not to buy the policy, says McCathron.

You can only make a claim on the policy when you sell the property.

If you sell your home for less than the amount agreed upon in your Protected Home Value policy, the Home Value Insurance Company will compare the sales price to the S&P/Case-Shiller Home Price Indices for your local market, says McCathron.

"The payout from the policy will be based either on the amount of the decline in the local market index or the actual drop in value, whichever is less," he says.

McCathron says that if your home value dropped more than the Case-Shiller index, "that tells us that something has happened to your house specifically or that you didn't do appropriate maintenance to keep up the home's value."

Homeowners are not allowed to negotiate the settlement.

"We are fully transparent to the homeowners when they purchase the policy that the maximum payout will be based on Case-Shiller and nothing else," says McCathron.

Deductibles and disasters

To prevent home speculators or flippers from abusing the insurance, the Home Value Protection policy has a deductible of 10 percent if you sell your home during the first year the policy is in place and 5 percent during the second year. After that, there is no deductible.

The policy requires that if a major disaster occurs in your area, you must wait one year before you can sell the home and make a claim under the Home Value Protection insurance policy.

 

 

 

 

 

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