I can’t tell you how many times I hear “That’s not what it appraised for” or “That’s not what I paid for the place” when I talk to clients about the amount that the insurance company wants to cover their house for. So I’m going to explain it to you, gentle reader, and help you understand why the insurance company wants to cover your house for “so much money”.
1. Appraisal value and sale value are just numbers.
The appraisal value is what the county thinks your house is worth – and everyone fights that number so they can pay less taxes anyway. Appraisal value is what you could theoretically sell your home for. Sales price is what you actually pay for your house. Sometimes (most times) the appraisal and the sale price are a vastly different number than what you should insure your house for.
2. Replacement cost coverage is there to help you replace your house – it’s what you want.
Unlike when you wreck a car, if you have a house fire or something else happens to your house, you are married to the land it was built on. You don’t just toss them the keys and buy another house; you rebuild. Most people don’t consider the cost of debris removal when it comes to their coverage. When your house burns, you will have to take away all of the burned up house bits and build a new house. I don’t know if you have done any major rennovations lately, but debris removal is pricey. Insurance companies build a lot of houses every year, and they know what it costs to rebuild – and to take away the trash. Every company has a “replacement cost calculator” that they use to make the estimate. They ask lots of detailed questions about the house to arrive at the coverage. If you have bought a replacement cost policy and haven’t answered a ton of questions about your house, your coverage may not be accurate.
3. Actual Cash Value is a fool’s game.
Actual Cash Value (or ACV) coverage is a differnt kind of coverage – basically, you pick the number that you think your house should be insured for, and then get ready to be angry at claims time. This is the kind of home insurance that people who want to “just insure the house for what I paid” get. Well, here you get less than you insure for – and I’ll explain. An ACV coverage covers the home for Actual Cash Value – Less Depreciation. That “less depreciation” is the kicker there – say you have an average house, built in 1974, that you paid $140,000 for – that house is 37 years old, and will be depreciated somewhere beteween one and two percent per year for 37 years. Even if it is only 1% depreciation, it means that your home would be valued at $88,000 – before you pay your $1500 deductible. If the place were to burn down, you would be doing well to put up a trailer where your house once stood.
Your home reperesents a significant investment – but more important, it is your home, a place where you will be dry and out of the cold, where you will hang photos of your kids, your dogs – and photos of your kid’s dogs. When people come to me with lower coverage than they need, or whith an ACV policy, or with a really high deductible, it is because they didn’t take charge of their insurance. Generally, when they have these “bad” policies, the price difference is negligible when compared to a policy that actually covers them well.