How much insurance should I have on my house?

Frequent questions I get are: How much insurance should I have on my house? Why do I have to insure my house for greater than market value? How do I know if I'm fully covered? These are all great questions. What scares me as an Insurance Agent is when someone comes in with a Homeowners Insurance Policy and asks me if I can make it cheaper and are totally fine with their home being insured to the fair market value on the home.


Let me address why it takes more than fair market value to rebuild your home. It's sort of like your car. For simplicity let's say it's a 2006 Toyota Corolla. For easy math let's say it's current market value is $5,000 because of depreciation. When the car was new off the lot it was $12,000. If you sold your car to an average Joe you would sell your car for $5,000 and be happy. To replace it and purchase a new car it would be more like $15,000 because it's 2016 and cars cost more. Now if your car burned to the ground would you rather have $5,000 or $15,000. Is it going to cost $5,000 or $15,000 to purchase a new car?


In application to a home it's even more complicated than this. If a home was a car you wouldn't just be going and buying a new car which has been manufactured and is waiting for you on a lot somewhere. (Actually you can, but you'd be purchasing a modular home, or a mobile home, but the value is obviously less.) It would be more like going to the local auto parts store and purchasing all the parts for the car and building it from the ground up. It would probably cost you more like $30,000 to build that car. With a house you also have to clean up all the rubble. 


The process is as follows in a simplified version. You come home and your $150,000 house has burned to the ground. Market value has risen recently and now your home is worth $200,000, but you have had the same policy since you purchased the home 3 years ago. Now we can get down to the nitty gritty and talk about how its insured to 125% (which still wouldn't be enough coverage) and how the insurance company will raise coverage on the home each year. (it's very slightly and not always enough or accurate) The first thing you have to do is get a backhoe and dump truck in to remove all the debris which will run you $23,654. $126,346 is what you have left. Next is to pour your foundation. $40,565 which lowers you to $85,781 is what you have left. Etc


Can you see how fast already $150,000 goes? The reason your home can be a purchased at a lower price is because:


1 They value homes on square footage. So your 2,000 square foot home with granite countertops, tile shower, hardwood floor etc home will basically value the same as your neighbor who has vinyl showers, carpet floors and vinyl countertops. 


2 The home isn't in a subdivision surrounded by other homes being built. Building permits work differently once all the homes in the area are finished. They can now only work 8-5. Contractors have to give a 30 minute lunch and a 15 minute break, so they can't even work a full 8 hours. During construction they work from sun up to sun down. This construction process costs more because for each day they are on a project they have to have insurance, and a city permit etc. 


3 Shipping of raw materials is going to cost more to one home site than a subdivision, as well as garbage containers, etc. If you have left over materials they are either wasted or transported which causes more expense. 


At the bottom I will leave an example of an Estimated Cost Replacement Value of a home valued by the homeowner to be $227,000 Zillow approx value is  $266,838 and the replacement cost estimator came back with $605,439.


Hope this helps


Morgan Lindstrom

Lindstrom Insurance Agency



Valuation Totals Summary Cost Data As Of 08/2015 Reconstruction Cost w/o Debris Removal $581,785 Debris Removal $23,654 Reconstruction Cost with Debris Removal $605,439


Building Description Main Home Year Built 2006 Construction Type Standard Style Rambler Number of Stories 1 Total Living Area 3184 Square Feet Basement 100% Basement Type Below Grade Basement Finished 100% Basement Finish Type Standard


Optional Building Data Main Home Perimeter Automatically Calculate Perimeter Site Access Flat Area/Easy Access Roads Elaborate Roof N


Materials Roof Shingles, Asphalt/Fiberglass 100% Partition Walls Drywall 100% Heating & Cooling Air Conditioning Central Air Conditioning, Same Ducts 100% Heating Heating, Gas 100% Ceiling Finish Drywall 100% Floor Finish Carpet, Acrylic/Nylon 70% Hardwood 18% Tile, Ceramic 12% Exterior Walls Brick on Frame 25% Stone on Frame 75% Wall Finish Paint 100% Interior Features Fireplaces & Wood Stoves Fireplace, Gas 1Cnt Kitchens & Baths Kitchens Kitchen, Designer 1Cnt Baths Full Bath, Custom 2Cnt Half Bath, Custom 1Cnt


Valuation Totals Detail Coverage A Cost Data As Of 08/2015 Equipment / Material Total Misc. Labor General Conditions 0 39,644 0 39,644 Sitework 0 0 0 0 Foundations 24,214 974 15,377 40,565 Slab on Grade 7,244 203 9,735 17,182 Framing 25,581 0 28,590 54,171 Roofing 7,438 0 11,067 18,505 Exterior Walls 39,763 1,480 47,242 88,485 Partitions 23,015 0 20,871 43,886 Wall Finishes 12,436 0 10,515 22,951 Floor Finishes 13,457 0 26,286 39,743 Ceiling Finishes 12,213 41 6,996 19,250 Equipment 4,493 82 79,657 84,232 Conveying Systems 0 0 0 0 Plumbing Systems 15,671 0 52,531 68,202 HVAC Systems 12,632 0 15,044 27,676 Electrical Systems 10,089 0 7,204 17,293 Attached Structures 0 0 0 0


SUBTOTAL $: 208,246 $42,424 $331,115 $581,785


Coverage A Debris Removal Reconstruction Cost with Debris Removal $23,654 $605,439 Reconstruction Cost w/o Debris Removal $581,785


Disclaimer MS/B costs include labor and material, normal profit and overhead as of date of report. Costs represent general estimates that are not to be considered a detailed quantity survey. Copyright © 2013 Marshall & Swift / Boeckh, LLC and its licensors.


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