With house prices falling, cutting your homeowners insurance coverage to save a few bucks could seem like a good idea, but you might want to think twice, say the folks at the Insurance Information Network of California.
A recent survey conducted for the non-profit Insurance Information Network showed that 26% of Californians think they should reduce their insurance coverage because the resale value of their home has gone down.
“This is a financially dangerous myth,” says Candysse Miller, IINC executive director. “Just because the resale value of your home may have declined does not mean that the cost to rebuild it has also dropped.”
Your homeowners insurance coverage should be based on what it would cost to replace the building and the contents. So just because your home’s resale value dropped from Orange County’s $645,000 peak median in June 2007 to the $420,000 median last month doesn’t necessarily mean your insurance coverage should go down that much.
“I was giving people just the opposite message two years ago — just because your home has doubled in value doesn’t mean you need to insure it to that amount,” Miller says.
She says you particularly need to make sure you’re adequately covered for any remodeling or upgrades. In a recent review of her own home insurance, Miller realized she was underinsured by $200,000 for her remodeled kitchen and upgraded bathroom.
“It’s costing me $300 more a year,” Miller says. “I figure that’s one trip to Starbucks every week.”
There may be a reason to reduce you insurance coverage. For example, if your lender required you to insure up to the amount on your mortgage, but you have paid down your loan since then and it’s now more insurance than you need.
If you want to reduce your annual premium, you might consider increasing your deductible. There are also numerous Web sites to comparison shop to find a lower rate. The California Department of Insurance also provides premium comparisons.
To get an estimate of how much it would cost to replace your home, you might want to check out this free calculator.
To see the Insurance Institute’s press release on its survey, CLICK HERE.
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misleading article, poor advice
insurance will generally not pay more than the structure’s fair market value (per appraisal) in thecase of a total loss.
example:
1) Purchase price: $1.2 million
2) current market value per realtor & appraiser $900,000.00
3) insurance coverage: $950,000.00
4) recent improvements: $200,000 custom attached garage
5) rebuild cost: $975,000.00
6) land value with no house: $300,000.00
What would the insurance (usually) pay in the case of a total loss?
answer: $600,000.00 max (the fair market value of the structure)
Sorry, thems the rules….
Insuring it for 1.2 million just makes the agent more money.
I am an insurance adjuster.
(Katrina, Ike, Malibu fires, etc etc)
This IINC group is a bunch of amateur shills, the register always prints their fluff, always weak info….
However if you have “guaranteed replacement cost” or similar endorsements you may be able to get full repair money even if it is more than the fair market value.
The policy limit is just one of several variables.
And my example above is just for illustration- usually the land value is more than the structure’s value, not less, but each home is different. If you own a victrian duplex in the inner city it is very likely that the rebuild cost will be much more than the fair market value. Again, every situation is different.
There is no substitute for an experienced, knowledgable agent.
Don’t be underinsured.
Don’t be overinsured either.
Don’t put youself at risk! Insurance is necessary. And you don’t want to end up losing your house! Home pirces are just still rediculously high, wait till it goes down and then buy.
And keep an eye on the trend so you’ll know what the value is for your home.
http://www.homepricetrend.com
Your homeowner’s insurance coverage ‘A’ for the Dwelling should be at an amount sufficient to rebuild your house new with like kind and quality materials. Your Dwelling coverage is not based on the fair market value of your home. If you have two homes built exactly the same but one is in Riverside and the other in Corona Del Mar, the fair market value will be vastly different but the cost to rebuild new will be nearly identical. You are not insuring your home for fair market value but for cost to rebuild new.
The dwelling coverage does not have to be loan value either. In the state of California the lenders cannot make you carry insurance equal to loan value; only the cost to rebuild new.
Best thing you can do is take out your insurance policy and read it. The new policies are easy to read. If you have questions call your insurance agent. that’s what you pay them for.
For most home the fair market value of the structure is more than the rebuild cost.
For some it is less.
There are appraisers who make their living doing appraisals for insurance companies. When the value of the structure is less than the rebuild cost, the insurance company pays the value of the structure (according to most policies).
Reading the policy is not the same as understanding what it really means when you have a loss.
HometownRenter.com has the questions to ask yourself if it is better to rent or buy in your situation. Do you need the flexibility of renting? or can you afford to stay in your home for at least 5 years or longer?
* Can you afford a 20% down payment?
* Can you afford a monthly payment on a 30-year fixed mortgage?
* ask your CPA … Does the tax benefit of home ownership offset a potential decline in home value?
* Have you reduced other real estate debt before you add more on this home purchase?
* Does a fixed monthly mortgage payment for the next 15 years outweigh the likely inflation of rents during that same time (called an inflation hedge)
These are broad questions that can have many variations for each individual situation. However, it is a good foundation from which to start your home buying process.
If you are in the market for a rental, visit http://www.HometownRenter.com to find your next rental home!