How much insurance coverage do you really need? You might have thought about your deductible or your liability limits, but what about the cost to repair or rebuild your home? Not all policies are created equally.
Replacement Cost vs. Market Value
One of the most important lines on your homeowners insurance is Coverage A. Coverage A is the amount of coverage you have for your actual home. This is your policy limit for repairs or reconstruction after your home is damaged or destroyed by a fire or other covered disaster.
Market value is what your home would be worth if you sold it today. This is based on things like what you paid for your home and how much similar homes have sold for in recent sales.
Replacement value covers actual construction costs. If a tornado destroyed your home, a replacement value policy would cover the cost of rebuilding an equivalent home regardless of current market prices.
Do You Need Market Value Coverage?
Your home’s market price is based on various factors such as its location. If you are close to a commercial center, in a great school district, or have a large piece of property, your home’s market value may be far more than its replacement value.
Like with other insurance, the more coverage you buy, the more it typically costs. Because you wouldn’t lose the land under your home even if it were completely destroyed, you may be able to lower your premiums by selecting replacement value instead of market value.
Reasons You Might Want to Increase Your Coverage
On the flip side, there are scenarios where you might want more coverage. One is to protect against rising construction costs. The second is that it can cost more to rebuild in an existing neighborhood when builders have to work around the existing homes and may not have new construction incentives.
More coverage could be either a market value policy or a replacement value policy that guarantees current costs rather than a fixed limit.
What About Your Mortgage?
If you have a mortgage, your lender will usually require you to carry coverage at least equal to the amount you owe. Even if they don’t, it’s usually in your best interests to do so. If your home were destroyed, you could be liable to immediately pay off your mortgage whether through your insurance policy or your other assets.
If you have a mortgage, your insurance payout will be divided between you and the lender. If you purchase the right coverage, you should receive at least roughly what you’ve paid in principal.
How to Select the Right Coverage
Work with your insurance agent to determine the right amount of coverage based on your home’s market value and possible replacement cost. Midwest Insurance Solutions has extensive local data and calculators that can help you make the right decision. We can also help you explore whether add-ons such as inflation protection or extended coverage can help protect you against swings in market or replacement costs after you select your coverage amount. To get help, contact one of our agents today.