Home Insurance Articles
How A Decreasing Home Value Affects The Cost Of Your Home Insurance Policy
2010-03-24
The first consideration in determining the best home insurance coverage is the expense of replacing your home. The replacement cost will be an estimation of your home's current value because it is impossible to predict actual future costs. It influences your eligibility for certain policy options. You have choices but your home insurance should include unforeseen circumstances such as changes in construction costs and building materials. Recently, homeowners experienced a dramatic change for replacing plumbing due to the escalating price of copper. The market value of your home has less influence on your insurance than the cost to replace it. Depreciation is the difference between the cost of the repairs and the value of your home before it was destroyed.
The insurance professionals say "the replacement cost of a home is 'NOT' the market value of the home." It does not include the purchase price you paid, the balance of your mortgage or the value of the land where it is located. All the best insurance companies agree that what you paid, what you owe and what you could get for your house on the current market have little effect on the cost to replace it. Prior to buying home insurance you need to have an appraisal done to determine the replacement value for your home. A reputable home builder can do this. Consult with the local home building association in your area if you don't know the local home builders. Your insurance agent can also help you.
If you have an older home you may not be eligible for 100% replacement cost, since certain materials may not even be available anymore, but there are options such as guaranteed replacement cost that ensure you have enough coverage at the time of an actual loss. When you have an actual, your claim will be affected by the depreciation (lowered value) of your home. Your home insurance company has the final say on the depreciation, so it is important for you to know in advance how they calculate it. Most insurance adjusters use computer software to be as specific as possible about your home.
You have an option to add a depreciation clause to your home insurance coverage. This is a good safety net to protect you from not being given sufficient funds to recover your home. Unlike a replacement cost policy, a cash-value policy covers the perceived value of your house at the time of the replacement, not the actual purchase price. If your house is now with less than you paid for it, the depreciation clause ensures you will be awarded the difference, once you have correctly filed the paperwork. Not all insurance policies are the same; do some research.