Advertisement
insurance

Is Your Home Underinsured?

If your home is insured for less than 100% of what it would cost to rebuild, you'll foot the difference.

Editor's note: This story has been updated since it originally was published in 2003).

Do you know how much it would cost to rebuild if your home were damaged or destroyed? Unless you count yourself among the few who actually read their policies each year, you could be behind the times: Insurance companies have been changing the way they cover homes, and you are assuming more of the financial risk.

Insurers have shifted the risk to you

Guaranteed-replacement-cost coverage, once the gold standard of homeowners insurance, is no longer common. With this kind of coverage, once you've met your deductible, the insurer promises to pick up the tab for rebuilding your home, and the burden is on the company to boost your coverage (and premiums) in line with appreciation and rising building costs.

Advertisement - Article continues below

Today State Farm, Allstate and other major issuers sell extended-replacement coverage that limits what they will pay to rebuild a home to about 120% to 125% of the insured value. Companies say they jettisoned guaranteed replacement because homeowners were deliberately understating the value of their homes. But costly natural disasters also played a role: storms, such as Hurricane Andrew's 1992 rampage through southern Florida, and wildfires, such as the one that burned thousands of homes in Oakland Hills, Cal., in 1991. In their destructive wake, insurance companies that had sold guaranteed-replacement policies learned they hadn't done a great job of tracking building-cost trends and hadn't factored into the equation the run-up in costs that would occur if extensive damage was concentrated in a relatively small area.

Advertisement
Advertisement - Article continues below

In Oakland Hills, for example, people were clamoring to move back into their homes and local builders and suppliers were overloaded. The result: skyrocketing building costs and some price gouging. (After Hurricane Andrew, Florida passed an antigouging law, and other states have followed suit.) And as some Hurricane Katrina victims discovered, they didn't have enough money to rebuild despite full payouts from their insurers (see Insurance Lessons After Katrina.

Get the price right

It's important to get the replacement cost of your home right, says Jan Weyhrich, loss-control superintendent with State Farm. If your home is insured for less than 100% of what it would cost to rebuild -- and actual costs rise above the extended coverage -- you are responsible for the deductible plus any amount over the 20% or 25% cushion.

Advertisement - Article continues below

To make sure that you get the correct amount of coverage, look for an insurance company that uses a method called total component estimating. This method of figuring repair and rebuilding costs is more accurate because it takes into account the actual materials used and any special features of your home.

If the company doesn't do this, look for one that does: A square-foot cost estimate could leave you seriously underinsured.

In addition, be aware that extended-replacement coverage is designed to cover rebuilding your home using today's standard building supplies. If you want to replicate custom features, such as hand-carved banisters, stained-glass windows or antique wood floors, ask your agent about a restoration-cost policy or buying add-on riders for your policy.

While you're shopping, get a quote on a guaranteed-replacement-cost policy. "If price gouging occurs after a disaster or the cost of building materials jumps, with guaranteed-replacement coverage you will get your home rebuilt without having to pony up for anything other than your deductible," says Jeanne Salvatore of the Insurance Information Institute. Chubb and Fireman's Fund are among the insurers that still sell full guaranteed-replacement-coverage policies.

Start at 100%, then stay current

After you've got a policy, tell the agent when you make any significant improvements to your house. Once every two years, determine what it would cost to repair or rebuild. The update should include a review of your home -- inside and out -- and can be done by phone. It should take into account upgrades, such as granite countertops and custom doors, and any remodeling.

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Shrink Your RMDs in 2021 and Beyond
annuities

Shrink Your RMDs in 2021 and Beyond

QLACs are a special type of annuity that lets you cut RMDs from your IRAs next year and beyond, reduce the taxes you pay and guarantee more lifetime …
August 6, 2020
How a Second Stimulus Check Could Differ from Your First One
Tax Breaks

How a Second Stimulus Check Could Differ from Your First One

The HEROES Act, which was passed by the House in May, would authorize a second round of stimulus checks. While the new payments would be similar to th…
July 22, 2020

Recommended

The Insurance Company Denied My Claim. What Should I Do?
insurance

The Insurance Company Denied My Claim. What Should I Do?

A lawyer specializing in insurance bad faith law explains why this happens, and outlines how to fight back.
August 6, 2020
Time for an Insurance Review
Coronavirus and Your Money

Time for an Insurance Review

You may need to update your policies in light of COVID-19.
July 30, 2020
Insurance Question: Say Rioters Destroy My Business, Am I Covered?
insurance

Insurance Question: Say Rioters Destroy My Business, Am I Covered?

If you ask your broker, the answer may be no. But don’t just accept that response. Know what your policy covers, and how to protect yourself.
July 29, 2020
Applying for Disability Benefits During a Global Pandemic
insurance

Applying for Disability Benefits During a Global Pandemic

It can take months or even years to get approved for Social Security Disability Insurance (SSDI) benefits in the best of times. Needless to say, now i…
June 24, 2020