Why do all insurance companies insist that you insure your home for replacement cost?

Q: I have a slab ranch home. Why do all insurance companies insist that you insure your home for replacement cost? It has a value of $150,000. But I have to have a $190,000 insurance policy for replacement cost. Since it is on a slab with no basement, and I have separate insurance for items in house. All I am asking is, if was burnt to the ground, I would want $150,000. But they all said no.

— C.L., Macedonia


A: I can’t imagine why they said no (cough, cough).

First, you didn’t indicate whether you have a mortgage. If you have a lien on the property, of course the lender is going to want the property to be rebuilt to its current form and condition if something bad happens.

Property records indicate you took out a $247,000 FHA loan in 2004 against the 1,600-square-foot home. Did you repay that yet?

Further, you say it would cost $190,000 to replace but you want to insure it for only $150,000? If it were leveled by fire, what would you plan to do? Build a kitchen, living room and maybe only two bedrooms instead of three, and one bathroom instead of two?

Even if you did own your home outright, it would be silly to insure it for less than it would cost to replace it.

If you’re looking to save money, you could drop that separate policy you have for the contents. Even if you have collectibles like jewelry or guns that need extra riders, you surely could get that coverage for less by adding to your existing homeowner’s policy. You need to find a good independent insurance agent to guide you through your options. And get a few quotes.

Beyond all of this, “you should never insure your home for market value,” said Mary Bonelli, spokeswoman at the Ohio Insurance Institute. Market values can swing wildly, as we’ve seen in recent years. Some people’s homes depreciated by 30 to 50 percent during the downturn. But their homes sure couldn’t be rebuilt for that.


By Teresa Dixon Murray, The Plain Dealer The Plain Dealer
on November 03, 2012 at 8:00 AM, updated November 03, 2012 at 8:04 AM

Posted on: November 8th, 2012 at 1:57pm by bwittenbaum. Filed under: Insurance Coverage News

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