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Does market value of my home determine the homeowners insurance coverage?

One of the most common misunderstandings with regards to homeowners insurance is how reconstruction cost or dwelling coverage is determined. If a home's market value is $250,000 it does not mean the cost to rebuild that home is the same. In fact the market value and reconstruction cost of a home can vary dramatically from one area to another. The old saying is true that real estate is all about location, location, location. This is often the case when you have two identical homes but one is in a modest neighborhood and the other in the most desirable location in town. The two homes are built by the same company, have the same materials and include the same features but they could be a few hundred thousand dollars different in market value.

How is reconstruction cost determined for homeowners insurance?

Most insurance companies use Marshall & Swift/Boeckh, a company that estimates rebuilding costs, to determine what it will cost to rebuild a home using new materials. From 2009-2010 Marshall & Swift/Boeckh has noticed an increase of 2.3 percent in rebuilding costs nationwide. While the value of homes nationwide has been decreasing since the financial meltdown the cost of materials and labor have increased. The amount of insurance will take into consideration the quality of building materials, size of the home, and cost of labor just to name a few. This is why the market value of a home has little to do with the reconstruction cost since land and location are not used as factors.

How do I determine what is an appropriate level of dwelling coverage?

Each year the cost to rebuild or reconstruct a home changes based on factors that we described earlier. In most cases the cost will increase due to inflation as materials and labor become more expensive. Whether you are buying a new home or just want to make sure that your current home is properly insured we will help you determine a good rule of thumb. Every home is different and every neighborhood is different when it comes to reconstruction cost estimates.

If you have a current appraisal on the home it will show the value of the land and the estimated cost to build that home today. As time goes on homeowners will remodel or add-on to the existing structure. Any improvement valued over $25,000 should be considered when reviewing insurance coverage with your company/agent. Many times people will not inform their insurance company that they have remodeled a kitchen or basement and if something happens it may not be covered on the policy.

A good rule of thumb when trying to determine dwelling coverage on a home is to multiple the finished square footage by $120 if it is a standard home or $180 if it is a custom home. For example a home that has 2000 sqft and is of standard construction quality would be $120 x 2000 sqft, or $240,000 in dwelling coverage. While this is not an exact calculation and will vary from state to state it gives you an idea what is a proper level of coverage. For more precise calculations ask a builder in your area what the per square foot cost to rebuild a home similar to yours.

Remember to have your home insurance policy reviewed each year to account for changes in inflation or remodeling.