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Home Values Have Dropped. Should I Decrease My Insurance Coverage?

The recession and housing market crash have taken a toll on homeowners. Many of us have seen the value of our home drop, with no recovery in sight. You might think that you should at least be able to save some money by decreasing the amount of your homeowners insurance. After all, if the home is worth less, shouldn’t I be able to insure it for less? Think again.

Homeowners insurance and the market value of a home are unrelated. In fact, while the value of your home may have decreased, the amount you need to insure it for may have actually increased.

Insurance companies calculate the value of your home differently than realtors or tax assessors. When you purchase a homeowners policy, you can choose between replacement cost coverage and actual cash value coverage. Replacement cost coverage provides reimbursement for the cost to replace your damaged property with new property of equivalent materials and quality. Actual cash value coverage provides the replacement cost of the property less depreciation (the decrease in the value of your property because of use, age and obsolescence). Whichever type of policy you have, it will not take into account changes to your home, community or the overall economy that affect the sales price of your home.

It is irrelevant to your insurance company if the market value of your home has decreased. The market value of your home includes the land the home sits on and the age of the home, its condition, location, the overall economy and even what a buyer is willing to pay for it. Replacement cost, however, is based on the cost of labor and materials to rebuild or repair the home according to the way it was before the loss.

Why Might I Need to Increase My Coverage?

It is always a good idea to review your homeowners insurance coverage with your agent every year. While real estate market conditions will have no impact on the amount of coverage you need, general economic conditions leading to changes in construction and labor costs will.

Construction and building materials costs change frequently. It is likely that it would cost more to build your home now than it would have before the recession. What’s more, there can be changes in building codes that can add costs to any repairs or rebuilding efforts.

Talking to your agent about the value of your home and making sure it is insured for the right amount will take only a few minutes. We can evaluate your policy and calculate your current replacement cost, as well as help you better understand how this amount is calculated. We can discuss how the age of your home and depreciation can affect the way an insurance company might reimburse you for a loss. And we can find you other ways to save money, like higher deductibles and maximizing the discounts that you are eligible for.

Has your home’s value held up over the last five years? What other concerns do you have about your home’s value, depreciation, and your homeowners insurance coverage?

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