Insurance: What If Your Home Is Worth Much More Than You Paid For It?

If your policy limits have not increased since you purchased your home, there’s a good chance that you’re now underinsured. However, it’s not necessarily because the market value of your home has risen, but rather because construction costs have gone up.

For insurance purposes, the cost to rebuild your home is what counts, and that’s probably very different than what you paid for your home, or how much you would pocket if you sold it today. For example, while the market value of your home includes the land it’s built on, the rebuilding cost does not. On the other hand, if your home has features that would be expensive to replicate, is built of materials whose cost has skyrocketed, or is located in an area where labor costs are high, the market value of your home may actually be lower than the cost to rebuild it.

It’s important to review your homeowners coverage with your insurer at least once a year. You should also call your insurance representative whenever you remodel your home or buy expensive items.

Although it’s ultimately up to you to make sure you have adequate homeowners insurance, your insurance representative can help you estimate the cost of rebuilding your home, using information about construction costs in your area. Be prepared to answer questions about your home’s features and square footage to help determine proper coverage limits.

And ask about adding an inflation guard clause to your policy (if available). An inflation guard automatically adjusts your policy limits over time to keep up with changing construction costs. Although you’ll still want to review your homeowners coverage periodically, an inflation guard can help keep you from becoming significantly underinsured.