Homeowners Insurance-to-Value Ratio Explained

The insurance-to-value ratio is a way to calculate whether or not a home is properly insured. It is the ratio of the amount of insurance coverage you have on your home compared to replacement cost of your home.

The reason this is important is two-fold: if the ratio is too high, you are probably spending more than you need to on your home insurance, and if the ratio is too low you could be faced with huge out of pocket expenses if you suffer a loss, even one that damages but does not destroy the home.

For example, if your insurance-to-value ratio is too low and you have a kitchen fire, you may find that your deductible and other costs are greater than the settlement amount. This is a greater possibility when dealing with older homes, where the original construction cost and materials are much more expensive today. And if your policy is written for actual cash value as opposed to full replacement cost, the ratio becomes even lower compared to the payout value of the property.

It is important to reevaluate the ratio each time changes are made to the home, including adding other structures to the insured property which are not directly affixed to the dwelling. This is easily explained by pointing out that keeping the original policy value after increasing the home value does not provide any recourse for the new value of the home, and the difference between the old home value and the new one would be an out of pocket expense unless your insurance increased as well.

Similarly, your personal property insurance in a standard policy is seldom sufficient to cover the replacement of all of your property. And while this ratio should be calculated separately from the insurance-to-value ratio, a similar equation can be applied. In a standard policy, your personal property is only covered up to, at most, 10% of the policy value, while an average family may own a total property value as high as half or more of the policy value after clothing, furniture and other incidental property has been calculated.