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Will Your Insurance Cover the Cost of Rebuilding Your Home?

After a disaster happens it is too late to determine if you have enough insurance to cover the cost of replacing your home and your lost valuables. And as we have seen from recent events, disaster has a way of striking without warning.

Savvy homeowners make it a practice to review their homeowner’s insurance on an annual basis to see if their policy still provides adequate coverage to rebuild their homes at current construction costs. This is especially important if you have recently paid off your mortgage and you only purchased enough insurance protection to satisfy your mortgage lender’s requirements.

When you evaluate your coverage, be sure not to confuse the real estate value of your home with what it would cost to rebuild it.  Another point to consider is whether or not your policy covers improvements such as a new kitchen or bathroom and major purchases, as well as rebuilding costs.

Most basic homeowner’s policies will provide replacement cost for damage to the physical structure of your home. Replacement cost covers the repair or replacement of damaged property with materials that are similar in kind and quality to what your home was built with.

For added protection beyond the estimated cost of rebuilding your home, you need a guaranteed or extended cost policy. This type of coverage is especially important if there is a widespread disaster that raises the cost of building materials and labor. A guaranteed replacement cost policy would pay to rebuild your home regardless of the actual cost. Insurance companies offer extended replacement cost policies, which provide an additional 20% or more of coverage above the limits found in the basic homeowner’s policy.

You should also consider purchasing additional coverage that will increase the protection of the standard homeowner’s policy:

  • Inflation Guard – automatically adjusts the rebuilding costs of your home to reflect changes in construction costs because of inflation
  • Building Code Upgrades – provides ordinance or law coverage that pays a specific amount toward increased building costs resulting from having to meet new or tougher building codes
  • Water Back-Up – insures your property for damage caused by the back up of sewers or drains

Standard homeowner’s policies do not include coverage for earthquakes or flooding, including flooding resulting from a hurricane. Flood insurance is available through the federal government’s National Flood Insurance Program, www.floodsmart.gov. However, you may be able to purchase the coverage from the same insurer from whom you purchased your homeowner’s insurance. Earthquake insurance is also available through private insurance companies. You should speak to your agent about purchasing flood and/or earthquake coverage if you live in a geographic area that can be hard-hit by these types of natural disasters.

The second part of your coverage evaluation should include a determination of whether or not you have adequate protection for your possessions. You can do this by conducting a home inventory, which itemizes everything you own and the estimated cost to replace these items if they are stolen or destroyed. If you find that your possessions are not sufficiently covered, you can increase protection in either of two ways:

  • Cash Value Policy – pays the cost to replace your belongings minus depreciation.
  • Replacement Cost Policy – pays the actual cost of replacing the item.

If you have a replacement cost policy for the contents of your home, your carrier will pay to replace lost or damaged items with new ones that are comparable. If you have a cash value policy, your carrier will pay only a percentage of the cost of any new items because they have been used and have depreciated in value. Generally, the price of replacement cost coverage is about 10% higher than cash value coverage, but the difference in cost will more than pay for itself in the event of a major disaster.