Three out of every five homes in the United States today, on average, are underinsured by 20 percent or more. For most of us, our homes are our greatest investment. Being underinsured as a homeowner means forfeiting our personal security in the event of a natural disaster, fire, or lawsuit. Let’s take a look at how nearly two-thirds of Americans came to be underinsured as homeowners, and what we can do to put good risk management into place as affordably as possible.
About 72 percent of Americans are classified as underinsured, according to property and casualty industry research. Many believe that their insurance coverages should be based on the original purchase price of the home. Others believe they have adequate coverage if their insurance coverage is based on the market value or current sales price. A financial institution often asks for a value of the mortgage. Some ask to insure their home at the tax value shown in public records. The truth is–the amount of insurance you need to purchase should be based on the replacement cost of the home.
What is replacement cost? Replacement cost is the cost to repair or replace the entire home, including all associated construction costs. Thus, this cost is vastly different than a home’s mortgage pay off or resale value.
Costs associated with rebuilding a damaged home can be substantially higher than those to build a new home. Here’s why:
- Specialized contractors are often engaged to rebuild a home at a higher labor rate than new construction laborers; labor accounts for the largest share of homebuilding costs.
- Additional costs of demolition, debris removal, and special architectural work can also drive up the cost of rebuilding your home.
- Many areas have tightened building codes. Even if your home is of newer construction, you may find more demanding building codes exist. Building code changes can add thousands of dollars to the cost of restoring your home.
- Repairing a house that isn’t totally destroyed often entails rebuilding from the top down, which is more labor intensive that new construction, which starts at the foundation and builds from the bottom up.
- When contractors have several homes under construction at once, materials are purchased in large quantities resulting in lower overall costs versus buying materials for just one project.
- Older homes, and any home that has undergone extensive remodeling, may have customized features or include expensive materials that may be expensive and difficult to duplicate when rebuilding.
Major home improvements can affect the replacement value, as well. Be sure to let you Sentinel representative know if you have undertaken any major remodeling projects since your home was valued for insurance purposes, such as new kitchen cabinets and solid surface countertops, enclosing an attic or finishing off a basement, to name a few.
How can you calculate your home and contents value for adequate coverage? First, know that you do not need to do this yourself. Your Sentinel Private Client Services team is here to help. before you give them a call, do spend some time gathering some necessary information, including:
- Age of home construction
- A measurement of the home’s total living area (square footage)
- Type of exterior wall construction (frame, brick, veneer, etc.)
- Number of bathrooms
- Roof type
- Type of construction (Custom or Standard)
- Any additional features, including: attached garages, decks, porches, pools, finished basement, etc.
You can also get an estimate of replacement cost from a reputable builder.
Regularly updating the replacement cost of your home is the best way to ensure you have adequate protection in the event of a covered loss. By properly insuring your home at the full replacement cost value, you are protecting your investment and your equity.
Give your Private Client Services team a call today to discuss this and any other insurance related questions.
Suzanne Cutsy, scutsy@sentinelra.com, 919-926-4648
Hilery Royster, hroyster@sentinelra.com, 336-842-4806
