A key question you’ll need to ask as you shop for a property insurance policy is: Exactly how much should I insure my home for? Or in insurance terms, you’ll be searching for the amount of Coverage A that you need.
At first, the answer to this question may seem simple — How much is your house worth? Surely that’s how much you’ll need to insure it for.
But this seemingly basic question is actually more involved than you may think.
There are two valuations of your home and property that you’ll need to examine in order to figure out exactly how much to insure it for. These are your home’s market value and its replacement cost.
To simplify these terms, use the following definitions.
First, let’s define what the market value of a property is. Essentially, this amount is how much you’d be able to sell your home for in a fair sale to a willing buyer at this moment in time.
Now, let’s look at how replacement cost compares. This amount is how much you’d need to pay to completely replace your home in the event that it was completely destroyed — ruined by a tornado or destroyed in a fire, for example.
How Market Value and Replacement Cost Impact Coverage A Amounts
Choosing your Coverage A amount (how much you want to insure your property for) requires considering both of these amounts. If you’re having trouble calculating them, you’re not alone. Again, it seems simple to know how much your home is worth or how much it would cost to replace it, but a plethora of factors go into both of these valuations.
For this reason, experts recommend going to professional insurance agents for assistance. Agents have special tools that can help calculate the exact amount of coverage you’ll need based on the replacement cost and market value of your home. These tools are called Replacement Cost Estimators. The tools take into account all necessary factors, such as depreciation of property and materials or inflation of material costs, the value of the land and location of your home, whether you have a mortgage, and other considerations.
The market value of your home will give you a general idea of how much it’s worth, but remember that your home’s market value is not how much you paid for it. This is a common misconception.
Also keep in mind that a replacement cost should not take into account the contents of your home, including things like furniture, appliances, clothing, and more. Naturally, you’ll want to have insurance for these belongings, but that coverage will be elsewhere in your policy and won’t be factored into the structural replacement cost of your home.
Likewise, don’t factor in the cost of the actual lot that your home sits on or any additional property. These things wouldn’t actually be destroyed in the event of a covered disaster or event like a fire. Therefore, they wouldn’t need replacing.
Co-insurance is another consideration to make when it comes to choosing a Coverage A amount. Co-insurance can be confusing, and it’s not to be conflated with the concept of co-insurance in health insurance.
With most property insurance policies, there is something called a co-insurance clause, which dictates how much a policyholder is required to insure their home for (what percentage of their home’s value they have to insure). If they don’t insure the proper amount and they make a claim, their claim payment may be reduced because of what’s called a co-insurance penalty.
Speak to an Agent at Mooney Insurance
To best insure your home and reduce the risk of co-insurance penalties or inadequate coverage that leaves you without a home and paying out-of-pocket for damages, speak to one of our highly-qualified agents at Mooney Insurance. We’re here for you! Call today.