When I saw this Mar 31, 2009 online AP headline:
US home price drops set records in Jan.
My insurance agent brain flashed back to a post I had made awhile ago about rebuilding costs. I thought I’d revisit the topic one more time given the amount of money at stake should a disaster befall your home.
I checked all of the handout pamphlets we have in the office and sure enough I found one titled “Rebuilding Your Home…The real cost may surprise you” published by a 200 year old insurance company. This pamphlet gave me some information I hadn’t included in the previous post.
I don’t know what it is about human nature but from what I gather from the people with whom we speak they believe because their home has dropped in value so have replacement costs. That simply isn’t the case and that’s why my insurance agent brain kicked in. In that previous post, I had mentioned an auction that took place in our county in which 3 properties were auctioned for $45,000 and 3 properties for $19,000.
If the new owners of these homes actually believe their replacement cost is equal to their purchase price, they are in the wrong boat going to the wrong destination. You and I would like to own three $19,000 homes given the rental income potential but we wouldn’t like to pay to rebuild them even in these economic times.
The pamphlet I mentioned above makes this bold statement: “It is estimated that the typical homeowner is underinsured by as much as 27 percent.” This is a national figure and may not be applicable in your area. What our office finds is that most people in this county are over insured. It seems some people have been talked into insuring the land as well as the home.
Let’s talk about that for a moment. Being over insured is just as bad, or maybe worse, than being under insured. You are tossing good money for a protection you will never receive. I am not aware of any insurance company that will pay for the land your burnt home now sits on. I could be wrong and such a company exists but I don’t know how to find them.
Can you insure vacant parcels? Of course, but that is a different type of insurance. I won’t go into that in this post. Suffice it to say, don’t insure land. Make sure your agent actually uses replacement value figures for the home without the land included.
Here is a rule of thumb we use in our area. Because replacement costs run $120 to $150 per square foot, we simply multiply the homes square footage by both numbers and ask the client with which number they are most comfortable. That seems to be fair given they know their property far better than anyone else.
We also explain the 150% replacement policy to the client. This simply means if your house is insured for $200,000 for example, the insurance company will pay up to $300,000 if it burns down. The final decision is up to the client. Our experience tells us most people like this feature for its obvious payout benefit and, believe it or not, lower cost.
Back To Underinsured
If 27% is correct, there are a lot of people who will be coming out of pocket for tens of thousands of dollars in the event of a fire or other disaster. Real estate investors usually own more than one property. Applying the 27% figure to this group means a lot of otherwise savvy people are falling short on protecting their investments.
I’m not saying every investor is inadequately insured. I’m saying I’d bet some investors fall into this pool right beside Joe and Mary Homeowner. Getting a free home owner insurance check up may be the best thirty minutes ever spent.
A caveat: Everything I just said is meant as information only. I am not soliciting any insurance business nor am I telling you what is right for you. The final decision is yours but, in my opinion, having as much information as possible is extremely wise. After all, it is your money.