Your home is probably the biggest investment you will make in your lifetime. As such, you will want to protect that investment by purchasing home insurance.
The amount of coverage you choose for your home insurance policy is up to you. If you have a mortgage, then the lending company will require that you at least insure 100 percent of the unpaid balance. The bank wants to ensure that their investment is protected as well as yours.
While there are various options for coverage available on the marketplace today, insurance companies offer incentives for you to purchase additional protection. If you have insurance equal to the value of your home, then you may qualify for a discount. The reduced rate to your premium will vary between insurers, but it could range between 5 and 10 percent.
So, what does insured to value mean? This means that if you have up to 100 percent of the value of your home insured, you may receive a discount. There are different ways to determine the value of your home. The two most common are market value and replacement cost.
Market Value vs. Replacement Cost
Market value is based on the amount a person would pay today for a home and its surrounding property. This amount varies year to year based on supply and demand in the market. Therefore, insurance companies prefer not to use market value as an accurate measure. Sometimes, there are too many comparable homes for sale in the same region, reducing the value of the home because buyers have so many options to choose from. Other times, there are too few homes available available, and the market value of the home increases.
Market value does not consider how much it would cost to replace or rebuild a home, should it be damaged by a natural disaster, fire, or another incident. Market value and replacement cost can be two very different numbers.
Insurers find replacement cost a better marker for home insurance coverage than market value. Replacement cost considers the amount of money needed to rebuild. It does not consider market value or the value of the land surrounding the home—only the home itself.
The replacement cost is an estimate, which new homebuyers can obtain by either speaking with a professional contractor or an appraiser. Your insurance company may even have employees who specialize in appraising home replacement costs. Be sure to note any special architectural elements and custom builds. This will affect the replacement cost.
Once you have your home replacement cost estimate, your independent insurance agent will speak with you about the coverage options available. If you choose to have 100 percent of the replacement cost value insured, you may receive a discount. Insurance companies like to reward clients who choose this option because it is a marker of responsible home ownership. Often, individuals with more coverage are less likely to claim a loss.
Keep in mind that you should update your home replacement cost estimate after you have made improvements, remodeled, finished the basement, or added an extension onto your home. This will likely increase the replacement value and you will want to make sure that it is covered. Sometimes, insurers have a limited window for notifying them of the home improvements so don’t procrastinate!
Insurance companies realize that your home will increase in replacement cost with inflation. This is taken into account and will be noted in the policy agreement.
Speak to an Agent
Speak to an independent insurance agent today about the insured to value home discount. They will have the knowledge and experience to recommend the right home insurance products and discounts that best suit your needs.
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