Has the value of your home been increasing every year? Or, are you concerned that your homeowners insurance company might not be willing to renew your policy, as was recently announced in Florida? In today's economy—both situations mean it's time to take a close look at the value shown on your home insurance. And update your current policy or get ready to shop for a new one. You might even reduce your insurance costs.
First—some basic information
When you bought your home and insured it for the first time, your agent probably measured the home and asked you for basic information about the number of bedrooms, bathrooms, living spaces and extras like a fireplace, deck, finished basement—and dogs (because certain breeds may increase your rates). Based on the size, construction and interior finish of your home, it was insured for a certain amount, which is listed on your policy as either the Actual Cash Value or the Replacement Cost. Remember, that what you are insuring is the cost to repair or rebuild your home—and that does not include the value of the land. In other words, the value shown on your policy does not include the value of your lot.
Most insurance companies have a formula for increasing the amount of coverage every year, to keep pace with increases in the cost of materials and labor. So, if you've owned your home for a while, you've probably seen small annual increases in the covered amount, and most likely in your insurance premium. But, a formula that automatically increases the value of a home is not perfect. And, sometimes the coverage amount is overstated.
Ask for a home insurance policy review
Each insurer has a different approach to when and how they will review a home's value, so ask your agent or call your insurance company. The time to do this is before your policy renews, so that the value can be re-assessed and your insurance premium can be adjusted before your bill arrives.
What you can expect is that either your agent or an underwriter at the company will ask you a series of questions about your home, in order to determine the current value for which it should be insured. Common questions include whether you've replaced any major items like a furnace or hot water tank, the condition of your appliances and flooring, and other items that have changed since you first insured your home. If this re-assessment shows that your home value was actually higher than it should have been, you can expect a rate adjustment at your next policy renewal.
What happens when market values drop?
If home values have declined in your area, you might expect your insurance bill to drop, too. Sadly, that's not the case because what you're insuring is the cost to repair your home—not to sell it. Since the basic costs of building materials and contractors' labor rates are not going down, repair costs will continue to increase—and your insurance coverage needs to keep pace with those increases.
So, why would a home insurance adjustment ever help? Since insurance is designed to compensate you for the value of what you could lose, the cost to replace those things that depreciate over time might decrease from year to year. For example, while construction costs go up every year, the cost to replace your appliances or flooring will decrease as those items depreciate. Thus, the covered amount on your home insurance policy should increase very slowly each year—and that's why we recommend that you double-check it.
Do a home inventory today
Ok—we know this never makes it to the top of the to-do list. But, seriously, if you spend one hour doing a video, taking digital pictures or even completing a handwritten list, it will pay off if you ever have a fire, flood damage or a theft. Once your inventory is complete, be sure to keep a copy at work or give one to a relative, so you can find it when you need it.
Compare rates and coverages every three years
Even if you don't live in Florida or your rate hasn't changed recently, it's a good idea to ask another company for an insurance quote—and see what value they assign to your home, based on their questions. Every insurance company asks slightly different questions—and may provide you with a value that's closer to your sense of the market value. And, you might find different deductibles or discounts that can help you save even more. If you decide to switch, you may want to change your car insurance, because many companies offer a multi-policy discount.
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