As home values rise, should you rethink your homeowner’s insurance?

Chris Kissell

After many years of sinking, home values finally are on the rise again.

Nationwide, home sale prices have risen for 10 straight months, and were up 8.3 percent in December 2012 compared with December 2011, the biggest increase since May 2006, according to CoreLogic, a major provider of information about residential real estate.

For homeowners, this cause for celebration may trigger worries that their home insurance coverage no longer is adequate to protect their investments.

There are many good reasons to boost your home insurance coverage as the years roll on, says Tully Lehman, a spokesman for the nonprofit Insurance Information Network of California. But rising home values should not affect your insurance needs, he says.

“In short, the two issues are unrelated,” Lehman says.

Too many homeowners equate the insurable value of their home with the price it would fetch on the market. Lehman says he saw such misguided logic at work a few years ago, when California home prices began to fall.

“There were those who believed they could reduce their insurance policy limits because they believed, incorrectly, the change in home value impacts the insurance need,” he says.

In fact, a poll commissioned a few years ago by Lehman’s group found that 26 percent of Californians thought they should reduce their insurance coverage to account for diminishing home values.

As home values rise, should you rethink your homeowner’s insurance?
As home values rise, should you rethink your homeowner’s insurance?

A better way to calculate

When calculating how much homeowner’s insurance you need, it’s more important to focus on rebuilding costs, Lehman says. These are also known as “replacement costs.”

“The rebuilding costs – the cost to rebuild the home after a disaster – may be significantly different than the market value,” he says.

For example, Lehman says that in a pricier neighborhood, a simple ranch-style home could cost $1 million to buy but would cost only $300,000 to rebuild. It’s the second figure that homeowners should keep in mind, he says.

“Your goal as a homeowner should always be to have an insurance policy sufficient enough to replace your contents and replace the home,” Lehman says.

Of course, those rebuilding costs are not fixed over time, says Lori Conarton, a spokeswoman for the nonprofit Insurance Institute of Michigan.

“Repair costs do tend to normally increase with inflation,” she says. “It is important that homeowners have enough insurance to cover the cost of rebuilding their home at (contemporary) construction costs.”

The nonprofit Insurance Information Institute offers the following rule of thumb for calculating replacement costs: Multiply the total square footage of your home by local building costs per square foot.

Other factors that may affect your building costs include:

  • Exterior wall construction type (such as frame, masonry or veneer).
  • Style of the house.
  • Number of rooms.
  • Type of roof.
  • Additional structures, such as garages and sheds.
  • Special features such as fireplaces and arched windows.

To learn about local building costs, call a real estate agent or your local builders association.

Renovations and additions

Mary White, assistant vice president for product development in the personal lines department at The Hartford, recommends meeting with an agent annually to discuss your policy — regardless of whether home values are rising or falling. By meeting with an agent each year, you can discuss whether your home has undergone changes that require you to tweak insurance coverage.

Before meeting with your agent, it’s best to do a little homework, White says.

“Take a check of your property and think about if you’ve made any changes to your home,” she says. “Have there been any updates?”

Renovations or additions are likely to make the home more expensive to rebuild. It’s important to let your insurer know about the new feature so your insurance coverage limit can be adjusted higher.

Failing to insure for the home’s higher replacement cost can become a problem if you sustain a total loss, only to find out that you don’t have enough insurance to cover the entire house, White says.

Saving money

In some cases, talking to your insurer about an addition or improvement actually may result in lower premiums, White says. For example, putting a new roof on your home reduces the likelihood of a leak that could damage the home and trigger a claim. That lowered risk may be reflected in a lower premium, White says.

An updated electrical system and a newly installed burglar alarm are other examples of changes that can work to your benefit — in both personal safety and premium discounts.

But regardless of whether improvements cause your premiums to rise or fall, your focus should remain the same – making sure you properly insure your home. As Lehman says, when disaster strikes, “your home is the one thing you can’t take with you.”

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