It is estimated that about 60 percent of American homes are underinsured by an average of 22 percent. Your home is probably your largest single investment, so insuring it adequately is an important part of maintaining your financial independence.
You should have an amount of insurance that is sufficient to rebuild your home in the event it is totally destroyed by a fire, tornado, hurricane or other insured catastrophe. The amount of insurance should cover the cost of rebuilding your home at current construction costs, not including the value of the land. Don’t think about the price you paid for your home or the appraised value. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
There are other considerations to take into account when determining the amount to insure your home for, such as
- The expense of clearing debris from the lot before rebuilding can begin
- Fees for an architect or other design professional to estimate costs and produce plans to be followed by the contractor
- Rapid inflation in the cost of building materials and labor following a major catastrophe that affects a number of homes in the same area
- Local building codes that require replacement with additional features or more expensive materials
There are several methods used to estimate the replacement cost of a home. Some of the factors insurance companies use are:
- Building materials
- Type of foundation
- Attached or detached garages
- Square footage
- Location of the home
- Fireplace
- Upgrades
- Number of rooms and baths
Ultimately it is your responsibility to establish the value of your property and select the amount of insurance for your policy. We can help with that decision and explain what you can do to avoid an unpleasant surprise after a loss.