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Advisor Home
"We’re
not talking small amounts, either. The latest
survey showed the typical homeowner was
underinsured by 35%."
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How Much
Money Would You Need to Replace Your House?
Why
3 out of 4 homes are underinsured
If
your home burned down tomorrow, chances are
good you wouldn’t get enough money from your
insurance company to replace it.
A
whopping three out of every four homes
nationwide are underinsured, according to a
survey by Marshall & Swift / Boeckh. This
Princeton, N.J., company specializes in
estimating construction costs, and its annual
reviews of 3 million insurance policies
consistently show homeowners don’t have
enough coverage.
We’re not talking
small amounts, either. The latest survey
showed the typical homeowner was underinsured
by 35%.
These figures
aren’t news to the insurance industry, which
has known for years that most of their
customers weren’t buying enough coverage.
The point was driven home again this year by
the Colorado wildfires, which so far have cost
insurers $79.3 million.
“Most of the homes
that were covered were underinsured,” said
Loretta Worters, spokeswoman for the Insurance
Information Institute, a trade group.
Remodeling,
stingier policies take toll
Several
factors are at work:
- Insurance
policies cover less than in the past.
In the past five years, the vast majority
of insurers have done away with, or
radically modified, their guaranteed
replacement policies. Whereas once your
company would rebuild your home no matter
the cost, today most insurers cap how much
they pay to 120% of your policy’s stated
coverage amount.
- Construction
costs are on the rise. The cost of
rebuilding a home has risen about 3% a
year on average for the past decade, said
Gopal Ahluwalia, director of research for
the National Association of Home Builders.
Many homeowners haven’t updated their
coverage to reflect those costs. “Often,
the last time people think about their
homeowners’ insurance is when they get a
mortgage,” said Worters.
- Homeowners are
remodeling like crazy. Americans spent
$180 billion last year updating their
homes, often boosting the value of their
homes in the process. An estimated 75% of
remodelers fail to update their insurance
coverage to reflect those improvements,
said Bob Crine, president of Marshall
& Swift, the construction estimating
company.
“Most people don’t
think when they remodel their home to tell
their insurer,” Crine said. “When you
think of all the money that’s going into
houses that doesn’t get picked up (by policy
coverage increases), you begin to see the
problem.”
Crine’s
70-year-old company uses a huge
insurer-supplied database that compares
existing coverage with construction costs in
different areas all over the country. In
addition, some homeowners are asked to
complete surveys detailing all the features of
their home, while others houses are inspected
personally by Marshall & Swift employees.
The company has
found that homeowners consistently shortchange
themselves when it comes to getting enough
coverage, Crine said. Homeowners have more at
stake now, however, because so many insurers
have capped their replacement coverage.
The insurance
industry isn’t rushing to fix the problem,
either. Consumers are already sensitive about
rising homeowners’ premiums, and few agents
want to risk losing a customer by suggesting
they pay even more.
“Really, people
have to take the responsibility on
themselves” of monitoring their coverage and
making sure they have enough, Worters said.
“I wouldn’t want to rely on one person
(your agent) who may or may not know what your
needs are.”
The best insurers,
Crine said, ask their customers numerous,
detailed questions about the features of their
homes to determine how much coverage they
should have. Others rely on less effective
methods, such as multiplying the home’s
square footage by average construction costs
in the area.
The problem with
using average construction costs, said
Ahluwalia of the builders’ association, is
that your home could cost much more to
rebuild.
“A basic home with
regular carpet, two bathrooms and no fireplace
is going to cost a lot less (to rebuild) than
a home with two fireplaces, a three-car garage
and hardwood floors,” Ahluwalia said. “And
the trend has been to update and improve
everything, not only in new houses but in
existing stock.”
Are you covered?
So
how can you tell if you have enough coverage?
Take the following steps:
- Read your
policy. It’s not exactly summer
beach reading, but insurers have generally
made their policies more understandable in
recent years. You should be able to get a
good idea of what’s covered and what’s
not. If you have any questions, call your
insurer and ask.
Insure the
house, not the land -- or the mortgage.
The price you paid for your home, the
amount it’s worth now and the mortgage
you’re carrying are all pretty much
irrelevant when it comes to determining
how much insurance you should have. What
you really need to know is how much it
will cost to rebuild your house, and that
could be significantly more or less than
any of the above figures. Nationally,
about 24% of the average home price is the
value of the land, Ahluwalia said,
although that percentage can spike to over
50% in expensive markets such as Orange
County, Calif., New York or San Francisco.
Use averages
only as a starting point. The average
cost for building a home nationally ranges
from $65 to $150 a square foot, Ahluwalia
said, with homes on the coasts and in
major metropolitan areas coming in on the
high end of that range. Custom-built homes
in these high-cost areas often can cost
$200 to $400 a square foot. “The average
homeowner in today’s market should start
with (rebuilding costs) of $75 to $85 a
square foot, and then make adjustments
from there,” Ahluwalia said.
Talk to builders
in your area. If your insurer can’t
help you nail down the cost of rebuilding
your home -- and many can’t -- your best
bet may be to chat with contractors doing
work in your neighborhood. Their ballpark
estimates are likely to be much more
helpful and accurate than a guesstimate
from a company or agent who isn’t as
familiar with the quality and cost of
homes in your area. If you’re still
having trouble coming up with a solid
estimate, consider hiring an appraiser to
do the job. This can cost you $200 to
$300, but in the long run could save you a
world of grief.
Consider adding
upgrade coverage. The older your home,
the more it will cost to bring it up to
current codes -- and those costs typically
aren’t covered in the standard
replacement policy being sold to most
homeowners. Upgrade coverage is a
relatively inexpensive addition to your
policy that could pay off should you ever
face disaster. And the possibility of
disaster is, after all, why you have
insurance in the first place. Make sure
you have enough so that the tragedy of a
fire or other disaster isn’t compounded
by not having enough money to rebuild.
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