Does Property Value have anything to do with Reconstruction Value?

Over the past year one of the biggest questions I’ve been asked is ” because property values have leveled off or decreased should I lower my dwelling coverage on my house?”  This is a very good question, because if we were thinking logically like Spock on Star Trek, we would think it reasonable to reduce coverage as the value of our property decreased.  But the problem here is that the property value has NOTHING to do with what it would cost to reconstruct you home.

Most homeowners policies cover the reconstruction of your home if damaged or destroyed by certain perils (risks).  The  “dwelling coverage” on your homeowners policy is what covers the reconstruction of your home.  If properly written your homeowners policy would have exactly enough “dwelling coverage” on the policy to rebuild you home if it was totally destroyed.

The bottom line is that the cost to rebuild your home has nothing to do with what it would sell or appraise for.  Depending on the condition of the home and the market in the area, the sale or appraised value may be less than what it would cost to rebuild that same house.  On the flip side, if a house is in good condition and the housing market is stable, then the sale price or appraised value should be greater than what it would cost to rebuild the home.

Here are some practical ideas you can do today to make sure you have the proper reconstruction cost limits on your homeowners policy;

• Contact your agent and ask for a meeting to review your policy.
• Call some local contractors and ask them to give you a approximate cost per square foot if they were to build a home in your area.  Then once you get that cost simply multiply it by the square footage of you home and you can get a good idea of the coverage limit needed on you policy.
• Ask some of your neighbors what their coverage limits are – hoping they have the proper coverage.

Ultimately for most insurance companies, the responsibility for having enough coverage is on the insured NOT the company.  So it is so important that you take the time to be sure you have the right coverage – you don’t want to find out when it’s to late!

Any thoughts or comments on this would be welcome – simply add them below!

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