Your family home represents one of our most important personal assets. Protecting it through the purchase of homeowner’s insurance should be a high priority. To accurately estimate the insurance necessary to rebuild your home, in the event of a disaster plan for the worst. That is, assume a total loss of your home from a catastrophic event like a hurricane, tornado or unstoppable fire. Do not assume that your existing insurance policy will cover a ground-up reconstruction, particularly for higher value homes.
Given current market conditions, do not assume the valuation of your home on the real estate market is also the price of rebuilding it. Market valuations for residential real estate fluctuated in recent years and in some areas the after-effects of declines still linger. In contrast, replacement costs between 2007 and 2009 only flattened and by 2010 were rising anywhere from 2% to 6% annually. At the close of the 2nd quarter 2013, according to Insurance Company Quarterly Review, those costs had increased by 1.9% versus the same period in 2012. In short and on a macro-perspective, valuations have gone down and are recovering slowly while the cost of construction has never gone down and continues to move upward.
Additionally, do not assume that replacement formulas, particularly those used for non-custom homes will reflect your current rebuilding costs. The re-creation of any home, particularly one with special materials and architectural distinction, is a “one-off” and this must be figured into the cost to replace.
Once way to obtain a rough estimate of rebuilding costs is to continue to combine square footage and the date the house was built with materials used and its location. Based on these factors and current local construction costs, you can obtain a reliable figure. That said, if you insure your home with carriers accustomed to covering homes with above-average market values, they will be equipped to produce an accurate rebuild cost for a house like yours. Most likely, they will also regularly reappraise your house, especially to account for any renovations or additions that need replacing.
Although I don’t like “general rules,” most insurance companies automatically update your valuation limit with an annual adjustment at renewal that is typically in the 2% to 8% range. As to guaranteeing replacement costs, a typical homeowners policy stops paying your rebuild costs once your valuation limit is used up. However, a superior policy from a carrier serving wealthy families usually continues to pay, even when costs go over and above your valuation limit. In essence, not every policy is an “apples to apples” comparison.
In short, accurately calculating the cost to rebuild your house and then insuring it for that amount not only results in a new home that comes as close as possible to the original, but helps lessens the impact that the loss of a home has on every member of your family. We believe that regular reviews of your home value and your insurance can help avoid disappointments if you are unfortunate enough to be affected by a catastrophic event.
Stephen C. Peters
Founder & CEO
VisionQuest Wealth Management