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Question on Home Insurance & the Home Value - UnderInsured or OverInsured?
Old 11-14-2023, 07:49 PM   #1
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Question on Home Insurance & the Home Value - UnderInsured or OverInsured?

Alright so the past 2-3 years, (1) we've had home inflation increasing the value of homes, and (2) we've had construction cost going up.

Now, I'm renewing my insurance, and my insurer says my home is worth $50,000 more, if they have to replace and rebuild everything.
And their calculation is like $80,000 more than the value in Zillows.
The premium also goes up by 33%.

Now I say the increase is too high for 33%, because my home price did not go up that high.

So if I choose a lower amount like $30,000 lower, to save on Premium, what if real construction cost has gone up?
My question is - can I build a smaller home? Right now, I have 3,400+ sq.ft. and if say, for example, I get a very high quote from a builder, do I have to option to build a 3,000 sq.ft home instead of a 3,400 sq. ft home.

How do insurance treat this if the construction companies come up with higher estimates ?

Thanks for any feedback
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Old 11-14-2023, 07:59 PM   #2
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After a loss, you can absolutely rebuild a home of any size or none at all if you want to.

I would ask your insurance company the other questions.

My insurer explained at one point when I was interested in similar questions that if I underinsured my home by some measurable degree (20% maybe), that my contract with them allowed them to only do a pro rata reimbursement. So if you underinsure by $30K and your home is worth $150K, and you suffer a $100K loss, they would only reimbuurse you $80K.
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Old 11-14-2023, 08:05 PM   #3
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If your insurer is asking you to insure for the full selling price (zillow+) that seems nuts. Even in a disaster you'd have the land which is always a good chunk.

You can't usually chose a lower insured value, but you can lower the cost of contents, and whether you want actual or replacement value.
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Old 11-14-2023, 08:07 PM   #4
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The lot value and in many cases the foundation value can be subtracted from the cost to rebuild.
The foundation could restrict your ability to build smaller.
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Old 11-15-2023, 12:12 PM   #5
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Insurance is about rebuilding a home. What you sell it for has nothing to do with the cost of labor, permits, and materials. In most places, the sales price is higher than the insured value. But then, in some places during Covid, like Detroit, where most folks left homes vacant, the cost to rebuild was higher than the cost to buy the house.

So if the insurer is telling you pricing on materials/labor/etc has gone up $50K in the last 12 months that means you should accept the increase. To go for a lower amount would have you underinsured and any claim could then be pro-rated because you are not carrying coverage equal to 100% of the cost of replacement.
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Old 11-15-2023, 01:09 PM   #6
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From Bard:

Quote:
Total loss claim on home if home is underinsured for less than replacement cost?

If your home is underinsured for less than replacement cost and you suffer a total loss, you may not be reimbursed for the full cost of rebuilding your home. This is because most homeowners insurance policies have an 80% coinsurance clause. This means that you must insure your home for at least 80% of its replacement cost in order to be fully reimbursed for a total loss.

If you are underinsured, your insurance company will only pay you a prorated amount of your claim. The prorated amount is calculated by dividing the amount of insurance you have by the amount of insurance you should have had. For example, if you have $100,000 of insurance on a home that costs $200,000 to replace, you are 50% underinsured. This means that your insurance company would only pay you 50% of your claim, or $50,000.

There are a few things you can do to avoid being underinsured:
  • Get an accurate replacement cost estimate. The replacement cost of your home is the amount it would cost to rebuild your home from the ground up. This can be different from the market value of your home, which is what you would sell your home for. You can get an accurate replacement cost estimate from a qualified appraiser.
  • Review your insurance coverage regularly. The cost of building materials and labor can increase over time, so it's important to review your insurance coverage regularly to make sure you have enough insurance to cover the replacement cost of your home.
  • Increase your insurance coverage if necessary. If you find that you are underinsured, you can increase your insurance coverage. This will increase your premiums, but it will also protect you from financial hardship in the event of a total loss.
Being underinsured can be a costly mistake. By taking steps to avoid being underinsured, you can help protect your financial well-being.
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Old 11-15-2023, 01:28 PM   #7
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Originally Posted by Gotadimple View Post
Insurance is about rebuilding a home. What you sell it for has nothing to do with the cost of labor, permits, and materials. In most places, the sales price is higher than the insured value. But then, in some places during Covid, like Detroit, where most folks left homes vacant, the cost to rebuild was higher than the cost to buy the house.
This was the case with many of the older florida west coast homes after recent storms. Old homes built decades ago, that would now need to be replaced to code, with a cost far out pricing any policies those home owners had. Many were forced to sell the land and move inland.

Fine- they were made whole, you might think. But, after the trauma of a major storm, having no choice but to leave and move, and not afford to fix your home even though you are insured, is very sad for many people.

And of course you know who bought the land and what's happening with it...
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Old 11-15-2023, 03:40 PM   #8
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The premium was probably going to go up 20 percent anyway. So the added cost is only like 10 percent. You can save some money by asking them to lower the personal belongings. Thats usally ties to the homes value , but is usally way higher then the atually stuff you own, unless you have some picassos hanging around. And also ask them to run your credit score again, they cant higher your premiums if its worse but you may save 100$ if its better.
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Old 11-17-2023, 01:42 PM   #9
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Thanks everyone.
I think I need to deduct the cost of land, which is about $60,000,
since I want to rebuilt in the same land if the worst case scenario happens.
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Old 11-17-2023, 02:06 PM   #10
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Originally Posted by cyber888 View Post
Thanks everyone.
I think I need to deduct the cost of land, which is about $60,000,
since I want to rebuilt in the same land if the worst case scenario happens.
Be sure you have calculated the cost of clearing and removing the rubble if an existing house is being replaced. That can be far more than you might think.
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Old 11-17-2023, 02:40 PM   #11
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The only way to accurately answer your questions is to read your policy.

Example, can you rebuild a smaller home? Depends. My policy will let me rebuild a smaller home and then claim the difference for the value of home I didn't rebuild, but on a depreciated value. They will also allow me to rebuild on a different site, but only to the same expense as if the house was built on the original site.

Your policy might say (read) differently. In fact, it probably does.

Another question that nobody here can answer 100%. Can you reduce the coverage increase they suggest, and what happens if the costs are actually higher? Well, my policy says the company will pay the reconstruction costs up to 125% of the limit of coverage on my policy, should construction costs exceed the limit stated HOWEVER, that is contingent on my accepting their suggested increases.

Your policy probably has a similar stipulation, however worded differently.

The best advice I can give is to ask for a meeting with your broker or agent and run through your questions, and ask them to show you the verbiage in the policy for each question.
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Old 11-17-2023, 03:03 PM   #12
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DW is in the insurance biz (principles are common for most types of insurance).

She convinced the insurance company to only insure $170k a few years (we're probably closer to $200k now) ago as the chance of a total loss is slim and the lot definitely does not need to be insured. We also have a rider for replacement value of contents.

The lower insurance # reduces the 1% deductible for us. We got a new roof for $1700 instead of the $4k if we just did what they wanted. Lots to consider.

We also have a SIL in the home building biz & the build rate is $200/sq ft. Our house is 1150, so we can build all in around $230k, worst case.
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Old 11-21-2023, 11:16 AM   #13
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I just have a follow up regarding the need to be 80% covered for replacement cost.
I had my annual review with my independent broker yesterday. I brought that issue up. She told me it is company dependent and a given for commercial properties. For residential it depends.
I have our current policy with ASI Progressive and they have a 50% buffer on rebuild costs. My agent and I ran a rebuild cost calculator together and determined the true market cost to rebuild today and we are well within that coverage, but having the 50% additional cost as a just in case set my mind at ease.
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