Many people believe that the coverage limits of their homeowners insurance policy are linked to the market value of their home, according to the Insurance Information Institute.
The Institute sponsored the 2011 Insurance Pulse Survey, conducted by Opinion Research Corporation, and found that 48 percent of survey respondents thought that insuring their home for the market price was the correct level of insurance.
 It's no secret, your home value is probably less than what it was five years ago, but you may wonder why your insured value and/or your insurance premium is still going up. The cost to rebuild or repair your home (supplies, labor, etc.), have not gone down, according to industry experts. These components are what insurance premiums are based upon. In fact, insurance premiums will only take the structure and liability exposure into consideration.
The replacement cost and consequently the price of homeowners' insurance is based on the cost to repair or rebuild your home. Even though the recession has been hard on the construction industry, it still hasn't caused a major decrease in materials or labor.
The price the home might sell for is based on the market value of that home and the land upon which it sits. In this crazy upside down market we've been in, it's possible that the cost to rebuild your home is actually more than the market price.
"The real estate value of a home, that is the price you can buy or sell it for, has absolutely nothing to do with the amount of insurance needed to financially protect the homeowner in the event of a fire or other disaster," said Jeanne M. Salvatore, senior vice president and consumer spokesperson for the Insurance Information Institute. "Reducing insurance coverage because the market value of a home has decreased can result in being dangerously underinsured."
Some, people have questioned their high loan balances compared to the insurance amount on their policy. For example, the structure coverage might only be $195,000 but your loan balance is $250,000. This has caused some to be concerned about being underinsured. This usually happens when the home sets on prime real estate (beach or lake front property for example) or on several acres of valuable land. Keep in mind that insurance does not cover the land but your loan does. If your home had a total loss, the insurance coverage would pay for the dwelling to be rebuilt... not for the loan to be paid off.
The proper amount of insurance for your home is the amount it would cost to rebuild your home in the event of a fire or other disaster - your home's replacement cost.
If you're unsure whether or not you have the proper level of coverage for your home, please contact Bohn Insurance right away. We use the services of Marshall, Swift, Boeckh (a highly regarded estimator of building costs), offered through many of our insurers, to help determine an estimate of replacement cost. We combine this with Extended Coverage offered by many of our insurers to make sure our clients are protected in the event of a total loss.
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