When you first bought your house, you most likely got insurance to cover against disasters like fires and storms. Since that time, has the value of your home stayed the same? While there was a bit of a correction in Canadian housing prices this past winter, chances are if you bought your house 5 years ago it is worth more today. On top of that, maybe you may have taken advantage of the Home Renovation Tax Credit over the summer? This increased home value may not be accounted for in your insurance policy and if something happened to your home, you may be underinsured and scrambling to pay the excess cost of rebuilding.
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After any major renovation or market upswing, contact your insurance company to get your policy updated to the current value. While this will lead to an increase in your premiums, it will ensure that you won’t be stuck paying the additional expense if a disaster were to happen. The good news is that insurers do include a buffer of 20%-50%. So if your house is valued at $300,000, the rebuilding might be covered to $360,000 or as much as $450,000.
While not as widely available, your best bet might be to look for guaranteed replacement cost insurance. With this coverage, the insurer will cover the actual cost to rebuild your house. Check the actual details of the policy since some insurance companies use this description without fully covering the entire replacement and rebuilding. This form of coverage also leaves the responsibility to the insurer to make sure you’re paying adequate premiums to reflect the value of your home.
Insurance is bought to cover against catastrophic financial loss. You should make sure you are properly covered so that, when you need it, the insurance will be sufficient to cover your losses without any financial hardship.
So true. I think most people try not to think about insurance, so we need these reminders.
Timely update Tom as frankly some may have TOO MUCH insurance as well.
I like to think about a cost per square foot rebuild. Here in San Francisco, it’s around $275US/sqft.
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This is a great reminder for all of us. I had all of these details straight last year, but I admit that I can’t remember the specifics of our coverage right now. That is something to put on my to do list as I plan the 2010 finances.
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That is a good point you raise Tom! You always have to ensure you have sufficient coverage. However your home value and rebuilding cost are not always the same. Insurers often do not insure the value of your home but the rebuilding cost and the two are independent of each other, your home value can increase by 5% due to many things however the rebuilding cost may remain the same.
Another important point you raise is informing insurer of any renovation or upgrades to your home because this will increase your rebuilding cost.
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I actually review my insurance coverage every year to make sure I match up the cost of replacing my house.
however, don’t forget that your land won’t cost anything if your house burn down. Therefore, you don’t have to cover the full value of your house, but the replacing cost.
My experience with home insurance has been that of over insurance. If property values decline, like in the U.S., and your insurance remains at the elevated base, you are still only going to receive the current value of your home at most. Imagine you insure your home for $1 million when it’s only worth $800K; the most you will get for your home if completely destroyed is $800K. Also, don’t forget that it is the improvement that is insured, not the land. In Vanocouver for example, land values are very high so the improvement very small. Further, the improvement depreciates due to wear and tear – say a 40 year depreciation curve. This is the portion your home is insured for. Even if your total home value increases you can bet that almost the entire increase is in the land value, not the improvement value.
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@Smac20 often, almost always, homes are insured for their rebuild cost so your home value does not matter, the value could go down say from $1M to $650K, but your rebuild cost may stay the same or even increase. If your property burns down and is a total loss the insurance company is responsible for its rebuild cost, not how much your home is worth.
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Mike and Ray bring up a good point about the land not needing to be replaced. I came across this myself this spring with our new house… got insurance and asked “why is the amount lower than what I paid?” Then they explained the land isn’t included in the cost of rebuilding.
With the restoration of the house do check on what is needed to be updated as not only does this affect the insurance that you got to pay for the restoration but it would also affect the mortgage that you pay into as there have been changes to the house that would affect the house price and other details concerning the mortgage and it is something you cannot assume.