How to know if you need more homeowners insurance?
In most cases, if the value of your house has gone up due to simple supply and demand, you probably have plenty of homeowners insurance.
As home prices claw their way back to prerecession levels, you may be wondering if you need to increase the limits of your homeowners insurance to cover the increased value of your home. Unfortunately, the answer to that question will vary, and it depends on many factors. One of the biggest questions you need to answer is just why the value of your home has shot up.
In most cases, if the value of your house has gone up due to simple supply and demand, you probably have plenty of homeowners insurance. The cost to rebuild has not changed, only the price of local real estate has increased. Homeowners insurance doesn’t care about local real estate prices.
Real Estate Prices
The value of your house (or any house for that matter) will often increase due to demand in the local market. The more buyers there are for a house in your neighborhood, the higher prices will go.
When it comes to real estate prices, location is often a huge factor. Homes in up and coming neighborhoods or in a great school district will often increase in value much quicker than less desirable neighborhoods. It is also possible that neighborhoods can fall from grace as they age or the economy takes its toll on residents. In this case, demand will often fall and home prices will soon follow.
Homeowners insurance prices
The value of your house for homeowners insurance is much different than the real estate price.
Homeowners insurance only cares about what it will cost to rebuild your home in the event that it is completely destroyed due to fire, tornado or other covered peril. This is referred to as the replacement value. This value is calculated based on the size of your home as well as local construction costs.
Location does factor in when its time to calculate a homeowners premium, but not because your house is located in a great school district. Location dictates what type of threats your house is likely to encounter. If you are located in tornado alley, you can expect to pay more than in an area where natural disasters are less likely.
The value of the land is usually not included when it comes to homeowners insurance as most events that would destroy a home will leave the land pretty much intact.
Do I Need More Coverage or Not?
The value of your home can increase for reasons other than local demand. Anytime you make improvements, add square footage or remodel your kitchen, the cost of rebuilding your house goes up. Here are just a few reasons that you may need to increase the limits of your homeowner policy:
Dramatic increase in construction costs – If your city is suddenly the hot new place to live and experiences a building boom, local construction costs could skyrocket. This can be a hard factor to quantify so checking in with your local agent from time to time is a good idea.
Home Remodel – Whenever you add value to your home through renovation or remodeling, you need to talk to your agent regarding your coverage limits. A kitchen remodel can add a tremendous amount of value to your home as well as push up the cost to rebuild your house.
Adding square footage by finishing a basement or adding a bedroom will also dramatically impact the cost of replacing your home after a devastating event.
Any home improvements that increase the value of your home should be reported to your agent so they can recalculate the proper coverage limits for your home.
While home improvements will increase the value of your home, the cost of your insurance should not jump sky-high unless you make huge improvements to the property. If you are unhappy with the new premium, consider shopping online for multiple home insurance quotes so you can compare price versus coverage, and be sure to ask your agent if you are receiving all available discounts.