You may have heard the saying, "Your home is the largest investment you will ever make." This is probably true for most of us. That being said, it is important to take the time to properly insure your largest investment.
One thing that normally comes up while discussing home insurance is how to determine how much insurance you need. So lets discuss some of the different things I've heard, and the method you should use.
Should you insure your home according to the current market value?
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Should you insure your home according to the balance left on your mortgage?
Should you insure your home according to the purchase price?
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No, none of those methods are the proper way to determine how much insurance you need to protect your largest investment. We need to remember that the purpose of a home policy is to rebuild the home if something happens to it.
The proper way is by determining the reconstruction cost for your home. So what is the reconstruction cost and how is it determined for my home?
Reconstruction cost is the amount that it will cost to completely rebuild your home. This includes some "soft costs" that if you haven't ever built a house you may not have ever come across. These "soft costs" include permitting fees, architectural fees and the cost of demolishing and removing the damaged structure. The estimate will also include the current cost of labor and materials.
The good news for you is that you don't have to come up with this number. Your agent will be able to give you an estimate to work with.
Some insurance companies are now offering extended replacement coverage. This coverage will insure your home for a percentage greater (125% for example) than the estimated replacement cost coverage. This creates a buffer to protect you against potential swings in costs of labor and materials.
The reconstruction cost for your home will most likely be different than the current market value, purchase price or mortgage balance for your home. As always it is best to discuss your options with an experienced insurance agent. You don't want to be under-insured if anything ever happens to your largest investment, your home.
The bitterness of poor coverage lingers long after the sweet price is forgotten.
Joe Urvina is an insurance agent located in Gig Harbor, WA.
www.facebook.com/UrvinaInsurance
jurvina@farmersagent.com
Twitter - @UrvinaInsurance
(253) 858-5881