The most challenging part of insuring a home is deciding how much to insure it for. Every home is unique, and nobody knows what prices for labor and materials will be in the future if your home is damaged.
The “replacement cost coverage” most of us have on our homeowner policy is expressed as a dollar limit of coverage to rebuild or repair our home. Our insurance companies agree to put our home back to the condition it was in before it was damaged. They pay the builders, contractors, etc. as expenses are incurred during the rebuild. Once the limit of coverage on our policy is reached, the insurance company stops paying.
Deciding how much coverage to purchase is where things get challenging. I’ve recently asked a couple of builders in the area what it costs to build a home. They respond by saying “it depends” and after some groveling on my part for a numerical answer they’ll say, “from $200 to $250 per square foot for most people in the area”. A decent rule of thumb to work with. Watch out: Zillow is no help here. Zillow doesn’t tell you how much it costs to rebuild a home, it tells you what you could buy it for. These are very different numbers.
Here’s how I decided how much rebuild coverage to purchase on my homeowner policy. I selected a comfortable amount of coverage based on the above guidelines, and I added an endorsement to my policy (it costs an extra $40/year for most people) that, if needed, will provide additional coverage in case labor and materials increase in price after my disaster. Think “tornado vs. Frankenmuth” scenario. It happens. An extra $50,000 on the rebuild limit really doesn’t cost that much, all things considered. After a fire or tornado, however, the extra $50,000 might make a big difference. I like being confident Mrs. Michael will get her house put back to her satisfaction! Am I over-insured? I won’t know for sure until after the fire or tornado… so I hope I never find out.
Ultimately the amount of coverage on your policy needs to be a rebuild limit that you, your bank, and your insurance company believe will put your house back the way it was before it was damaged.
Most homeowner policies have six different coverages appearing on the declarations page. The rebuild coverage limit is the first one to appear, sometimes labeled a non-intuitive “Coverage A”. Check out your policy and see what you think of YOUR rebuild coverage limit. Then let’s talk!