If my home increases in value, should I increase my insurance coverage amount?
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Asked April 23, 2012
This can be a confusing situation for homeowners. The market value of the home increases, and the first thought is that the amount of your home insurance needs to be increased as well to match the market value. Unfortunately, this is an incorrect assumption, because the market value of the home is an arbitrary number that has little or no value on what the insurance is insuring.
The market value of your home is a completely different amount than the replacement value of the home. Since the purpose of homeowners insurance is to replace or repair the home if it is damaged or destroyed by a covered peril, the market value of the home has little bearing on the insured value. Material costs will increase, and you should increase the value of the policy to keep up with material costs, but the market value will fluctuate a great deal more and it would be nerve-wracking to try to adjust your home insurance value each time the housing market rises or falls.
The best idea is to insure the home for its material value. If it would cost $120K to rebuild the home at today's material prices, then your home policy should be for $120K plus any additional coverage you may need to have, such as flood insurance or increased liability personal property coverage. That way, if your home is destroyed, it will be rebuilt to the same specifications as the original home.
However, there are other factors in home insurance that may indicate an increase in the policy is necessary. Take a home inventory every 6 months or so, and use that to determine the value of your family's possessions. Since the amount of personal property you own could easily amount to more than the basic homeowners policy covers, you may need to increase the personal property limits of the policy, but not the entire policy value. Similarly, homeowners liability may not be sufficient to pay for serious injuries that occur on the property, but you can increase those limits without increasing the full policy value as well.
Answered April 23, 2012 by Anonymous