Home » Home Insurance » How Homeowners Insurance Values Your Property

How Homeowners Insurance Values Your Property

The first time you see the value your homeowner’s insurance has placed on

your home, it might shock you a little. That’s because the number is

probably nowhere near what you paid for your home, or what it is worth on

the market. There is a very good reason for this, and it can be a little

confusing at first. Before you panic, take a look at how an insurance

company values your home.


Reconstruction Cost Only

Your homeowner’s insurance covers the actual physical building that is your

home, along with everything that is in it. The purpose of homeowner’s

insurance is to make sure that if the worst were to happen, your home would

be restored to the same level as before the incident. So, if your home were

to burn to the ground, homeowner’s insurance would pay to completely

rebuild the structure and replace everything inside it.


The value that is placed on your home is based on a complicated system of

calculations used to determine what it would cost to rebuild your home from

the ground up. Things like the price of building materials and cost of labor

are all taken into consideration. What isn’t included in this amount is the

value of your land.


Why Isn’t Land Included?

Even if your house were to burn completely to the ground, you would still

have your land. You don’t lose that, nor do you lose the value of the land.

In many cases, the land on which the home sits is more valuable than the

structure itself, especially in high in-demand areas. When calculating the

value of your home, you insurance company does not add in the cost of

purchasing the land, because you don’t need to pay for that again.


What About Market Value?

Homeowner’s insurance isn’t really concerned with market value, because so

much of it is wrapped up in things like the land, the location, and the state of

the real estate market. All your insurance company is worried about is what

it would cost to recreate your home exactly as it was in that same spot. So,

market value and reconstruction cost really have very little bearing on each

other, except for the connection between pricey areas and the cost of

building materials which can be correlated.


The bottom line is, as long as your insurance company has the most accurate

information about your home—square footage, building materials used, and

all the important features—they can calculate an accurate amount of

insurance coverage for you. This reconstruction cost usually also has an

extra allowance of about 25%, just in case the calculations are off. In almost

all cases, this is more than enough.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: