With home values rising more than 40 percent from their lows during the financial crisis, a home is an increasingly valuable asset. For many of you, I know it is your biggest asset.
So let me ask you a question: are you doing everything to protect this asset? Oh, I know you have homeowner’s insurance. No one will give you a mortgage without an insurance policy. But all your lender cares about is that in the event of a catastrophe, the mortgage will be paid off. You want to make sure you will have enough to rebuild/repair. There are two key factors you should focus on:
Coverage That Reflects Current Building Costs. The market value of your home—as much as it may have rebounded—may still be less than the cost to rebuild it entirely, based on the current cost of material and labor in your area. Your insurance agent can help you with this calculation. If you haven’t increased your coverage level in five or 10 years, you could be underinsured.
Extended Replacement Cost Coverage. The most basic level of insurance value is called replacement cost, which will pay you up to 100 percent of the coverage limit in your policy. So for example, if your policy is for $250,000, the largest payout you could receive if your home was completely lost in a fire or other catastrophe would be $250,000. A far better option is Extended Replacement Cost coverage. In the event of an extreme loss, an extended replacement coverage policy may pay up to 120 percent to 125 percent of the policy value. For instance, if the insured value is $250,000 you might be eligible for a payout of $300,000 (125 percent). That’s a nice bit of extra insurance against rising building and labor costs.