In recent years, you’ve probably heard a lot about the housing crisis. Home values have fallen drastically, leaving many homeowners underwater in their mortgages and making it difficult to sell a home. You may have even thought, “Well at least my homeowners insurance rates will go down with the value of my house”. And yet, your rate has stayed the same or has even risen! What’s going on?
The reason for this is that your insurance premium is not calculated on the actual market-rate value of your home, or the price you could get if you sell the house. It’s based on the replacement cost of the home, which may be a completely different figure than the market value.
When you think about it, this makes sense. If something happens to your home, such as a devastating fire that completely destroys it, what exactly do you want from your insurance company? You want your house back. You want to rebuild it exactly as it was before. So your insurance rate is based on the cost of rebuilding the home.
While existing home values have certainly fallen over recent years, construction costs and materials have stayed the same or even risen in many areas. So unfortunately, you won’t see a drop in your homeowners insurance premiums simply because the selling price of your home might be lower right now. The good news is, your premiums shouldn’t rise based on market values, either. It’s still going to be tied to construction costs.
Remember to purchase enough insurance to completely rebuild your life in the event of a catastrophic loss. This means covering not just your primary home, but any outbuilding as well. Consider the contents of your home, as they are likely to be taken from you by any force strong enough to destroy the home. Also ask your insurance agent about coverage for loss of use – meaning the price of living somewhere else while your house is rebuilt. Knowing your insurance policy is key to maintaining adequate coverage and preventing unpleasant surprises after a disaster.