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Homes are Underinsured...Is Yours? If
your home burned down tomorrow, chances are
good you wouldn't get enough money from your
insurance company to replace it.
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%
The point was
driven home again this year by the Colorado
wildfires, which so far have cost insurers
more than $80 million.
"Most of
the homes that were covered we
underinsured," said Loretta Worters,
spokeswoman for the Insurance Information
Institute, a trade group.
Several
factors are at work:
- Insurance
policies cover less than in the past.
In the last 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 what 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 last decade, said
Gopal Ahluwalia, director of research for
the National Assn. 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, " Worters said.
- Homeowners
are remodeling like crazy. Americans
spent more money than ever last year
updating their homes, often boosting the
value of their homes in the process. An
estimated 75% of remodelers, said
construction expert Bob Crine, fail to
update their insurance coverage to reflect
those improvements.
"Most
people don't think when they remodel their
home to tell their insurer," said Crine,
Marshall & Swift's president.
"When you
think of all the money that's going into
houses that doesn't get picked up (by policy
increases), you begin to see the
problem." Crine's
company uses a huge insurer-supplied database
that compares existing coverage with
construction costs in different areas of he
country. In addition, some homeowners are
asked to complete surveys detailing all the
features of their home, while others louses
are inspected by Marshall & Swift
employees.
The 70-year-old company has found that
homeowners consistently shortchange themselves
when it comes to getting enough coverage,
Crine said. Homeowners have more at stake now,
however, since so many insurers have capped
their replacement coverage.
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."
So how can you tell if you haye enough
coverage?
It's
not exactly 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 like Orange County; New York
City or San Francisco. You
don't want to end up paying too much for
insurance, so make sure you're not paying for
land that will remain whether your home is
destroyed or not.
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.
Talk to builders in your area.
If your insurer
can't help you nail down the cost of
rebuilding your home, your best bet may be to
chat with any 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 intimately 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 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 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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