How Homeowner's Insurance Values Your Property
The first time you see the
value your homeowner's insurance has placed on your home, it might shock you a
little. That's because the number is
probably nowhere near what you paid for your home, or what it is worth on the
market. There is a very good reason for
this, and it can be a little confusing at first. Before you panic, take a look at how an
insurance company values your home.
Reconstruction Cost Only
Your homeowner's insurance
covers the actual physical building that is your home, along with everything
that is in it. The purpose of
homeowner's insurance is to make sure that if the worst were to happen, your
home would be restored to the same level as before the incident. So, if your home were to burn to the ground,
homeowner's insurance would pay to completely rebuild the structure and replace
everything inside it.
The value that is placed on
your home is based on a complicated system of calculations used to determine
what it would cost to rebuild your home from the ground up. Things like the price of building materials
and cost of labor are all taken into consideration. What isn't included in this amount is the
value of your land.
Why Isn't Land Included?
Even if your house were to burn
completely to the ground, you would still have your land. You don't lose that, nor do you lose the
value of the land. In many cases, the
land on which the home sits is more valuable than the structure itself,
especially in high in-demand areas. When
calculating the value of your home, you insurance company does not add in the
cost of purchasing the land, because you don't need to pay for that again.
What About Market Value?
Homeowner's insurance isn't
really concerned with market value, because so much of it is wrapped up in
things like the land, the location, and the state of the real estate
market. All your insurance company is
worried about is what it would cost to recreate your home exactly as it was in
that same spot. So, market value and
reconstruction cost really have very little bearing on each other, except for
the connection between pricey areas and the cost of building materials which
can be correlated.
The bottom line is, as long as
your insurance company has the most accurate information about your home-square
footage, building materials used, and all the important features-they can
calculate an accurate amount of insurance coverage for you. This reconstruction cost usually also has an
extra allowance of about 25%, just in case the calculations are off. In almost all cases, this is more than
enough.
