Your Homeowners Insurance Coverage May Need to Change as Well
You have seen headlines on how ‘hot’ the residential real estate market has become; home values have risen, costs of renovations skyrocketed, contractors are very busy – booked out for months. The rising cost of construction and house values can leave homeowners unknowingly underinsured.
Here’s how these trends can leave you underinsured, and what you can do.
What does underinsured mean?
In its simplest terms, you don’t have enough insurance to replace your home should it suffer a total loss. As an example, you may have your dwelling insured for $400,000. However due to the rising costs of construction labor, materials, engineering, architect, and permit fees the new cost is $500,000. In that situation you would be $100,000 underinsured. It is a common problem for homeowners. In fact, a large percentage of homeowners across America are underinsured today.
How do rising construction costs lead to underinsurance?
When the cost of materials and labor increases, the cost of replacing your home goes up as well. If you have recently completed a renovation to your home, the replacement cost to rebuild likely increased. You may need to adjust your insurance coverage to make sure your improvement is fully covered. Talk to your insurance agent and disclose the full cost of renovations; ask what they can do to help provide you with the proper protection.
Homes are selling for more which means your home may cost more to replace.
A hot real estate market has the side effect of raising the cost of rebuilding your home should misfortune strike. Talk to a reputable builder and inquire what is the per square foot cost of new construction. Multiply that value by the square foot of your home to obtain a rough estimate of what it may cost to rebuild your home. Compare that value to the insurance amount carried on your homeowner policy. If the number comes out higher than your coverage limit, you will need to increase your protection.
Building Code Changes
As building codes become more rigorous it adversely impacts the cost of construction. Today homes have to be constructed with stricter compliance to energy efficiency, better insulation, more efficient windows, wind resistant siding, roofing and energy efficient HVAC systems. All of these enhancements lead to increases in construction costs.
The improvements you made to your home will likely impact the rebuild costs; any additions you have added will definitely increase the cost of construction, as will normal house inflation. I understand we all want to keep our insurance costs low, however one important tenant of risk management is to ‘Never Risk a Lot for a Little’. To properly protect your home may cost less than a latte per month. Make the effort and review your coverage with a reputable agent; it is time well spent.
If any of this raises questions with you, contact our office for a complimentary review of your current homeowners’ coverage; we’ll provide a professional second opinion and offer recommendations on how best to cost effectively maximize your protection.
Douglas MacDonald is the CEO & President of Murray and MacDonald Insurance Services, Inc, with offices in Falmouth and Bourne.