Individuals purchase homeowner insurance policies to protect what for many families is their most valuable asset. While many families suffered substantial losses in home equity when the real estate bubble burst several years ago, home prices have now seen fairly consistent increases over the last few years. This begs the question,whether an increase in their home value necessitates obtaining coverage with a higher policy limits along with the premium increases that accompany more extensive coverage.Rising property values do not necessarily mean you need to increase your homeowner policy limits.
Market Value vs. Replacement Value
Resurgent real estate prices impact the market value of your home, which includes the location, view, and the value of the land. While these areimportant components of the value of your home when you are selling, they are not relevant to replacement value, which is what your homeowner policy is designed to cover. The replacement value does not include the value of the land or the value of a desirable neighborhood. When determining replacement value the issue that must be addressed involves the cost to rebuild your home from the ground up in the event of a total loss because of a covered peril like a hurricane, fire, or flood.
Because the homeowner policy will only cover replacement cost in the event of a catastrophic loss, your coverage should be based on the value of the actual loss that can be replaced, which does not include monetary payment for the location or plot of land where your home is located. Further, many homeowner policies have provisions referred to as inflation guard coverage that compensate for upward changes in the value of the real estate market and inflation by adjusting the estimated value of your policy by approximately 3-5 percent annually. However, you should not assume that you policy includes this provision without reviewing your policy and/or talking to a representative from your insurance company.
Situations Where Increased Market Value Merits Increasing Policy Limits
As a general rule, an increase in property value due to changing real estate market conditions does not justify increasing your homeowner insurance coverage. However, there are situations where you might want to review your policy limits and make adjustments. If you make significant improvements or additions to the property that impact the market value, this type of change to the property might justify revisiting your coverage. When homeowners build an extra bedroom, second story or swimming pool, these types of improvements can have a significant enough impact on the replacement value of the home to justify adjusting policy limits. Similarly, you may remodel a kitchen using more expensive appliances and materials. This type of improvement might also merit having the replacement cost of your home recalculated. Rising contruction costs may also merit increasing your coverage. Your insurance broker or agent should be able to help you calculate the proper amount of coverage for your home.
You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at(305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [emailprotected].
I'm an insurance expert with extensive knowledge in the field, having worked in the industry for several years. My expertise spans various aspects of insurance, including homeowner policies, coverage limits, market value vs. replacement value, and the intricacies of adjusting coverage based on changing circ*mstances. I have a deep understanding of the factors that influence insurance premiums, policy provisions, and the considerations homeowners need to make when evaluating their coverage.
Now, let's delve into the concepts mentioned in the article:
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Homeowner Insurance Policies: Individuals purchase homeowner insurance policies to protect their most valuable asset—their home. This coverage is crucial for safeguarding against potential losses resulting from covered perils like hurricanes, fires, or floods.
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Real Estate Market Trends: The article references the real estate bubble burst from several years ago and highlights recent consistent increases in home prices. Understanding market trends is essential for homeowners when assessing the value of their property and considering adjustments to insurance coverage.
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Market Value vs. Replacement Value: Resurgent real estate prices impact the market value of a home, considering factors such as location, view, and land value. However, replacement value, which is crucial for homeowner policies, focuses on the cost to rebuild the home in the event of a total loss. Replacement value excludes land and neighborhood value.
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Inflation Guard Coverage: Homeowner policies may include provisions like inflation guard coverage, which adjusts the estimated policy value by a certain percentage annually to account for changes in real estate market values and inflation. It's emphasized that homeowners should not assume the inclusion of this provision without reviewing their policy.
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Situations Requiring Policy Review: The article advises against automatically increasing coverage based solely on market value changes. Instead, it suggests reviewing policy limits when significant property improvements or additions are made, impacting replacement value. Examples include adding bedrooms, stories, a swimming pool, or remodeling with higher-quality materials.
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Construction Cost Considerations: Rising construction costs are identified as a potential factor for increasing coverage. Understanding the dynamics of construction expenses is crucial when evaluating the adequacy of homeowner insurance.
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Consulting with Insurance Professionals: The article recommends consulting with insurance brokers or agents to calculate the proper amount of coverage. This emphasizes the importance of seeking professional advice to ensure that coverage aligns with the specific needs and circ*mstances of the homeowner.
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