Market Value Versus Insurance Value

My insurance company estimates the cost to rebuild my home at way below the market value, even in light of the drop in housing prices. I live in a reasonably small house that was probably worth a bit over $600,000 at market peak and maybe $550,000 now. My insurance company says that I only need $454,000 in coverage. Can the insurance value really be that much less than the market value? I feel queasy about it.

Your situation isn't unusual. A home's market value and its insurance value are two totally different numbers. Your homeowners insurance pays to rebuild your home, and you'll still own the land even if the building is destroyed.

If you live in an area with valuable land, it can cost a lot less to rebuild than to buy the house. That's my situation: I live in a row house just down the street from the Capitol in Washington, D.C., and the location of my little plot of land adds a lot to the home's value.

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My insurer calculated my rebuilding cost to be much less than the market value, but I bought an endorsement that adds up to 25% over the insured amount if the rebuilding costs end up being higher than expected. The endorsement only cost me about $160, which is about the same amount as the money I saved by boosting my deductible from $500 to $1,000.

The opposite situation can be true, too. If you live in an area where land is cheap or the housing market has tanked, it could actually cost more to rebuild your house than buy it, especially if your home has a lot of special features, high-end materials and expensive architectural details. It's also important to let your insurer know if you've added an addition or made major upgrades, which can boost the rebuilding costs significantly. If you've done major home improvements, the insurance amount you originally calculated may no longer be enough.

You can estimate the rebuilding cost on your own at AccuCoverage.com, which is run by the company that provides rebuilding-price estimates to the insurance industry. Pay $7.95 and type in details about your house, age, materials and special features, and you're immediately given an estimate of the insurance value.

I did that for my house, and the number was similar to the one that my insurance company had given me. If the numbers are quite different, it might be worthwhile to get an appraisal from a local builder or appraiser. Some insurers, such as Chubb, send an appraiser to look at the home every few years. (Chubb and Fireman's Fund are two of the few companies that still pay for the full replacement cost of your home, regardless of your insurance amount.)

For more information about homeowners insurance, see Keeping a Lid on Home Premiums.