For many homeowners, it is normal for the value of their home to increase with time. When property values increase, there is often a great deal of focus on the increase in resale value, the likelihood of an increase in profits, and some people even rush to also increase the coverage on their homeowner insurance policy. However, this last step may or may not be necessary. If the property value of your home has increased significantly, learn more about whether it is time to review your policy coverage.
Cash Value vs. Replacement Value
Before you automatically assume that you do not have enough coverage for the new increased value of your home, it is important that you understand the difference between cash value and replacement value.
Cash value is the amount of money a buyer would potentially pay for your home, such as the listing price. The replacement value is the amount of money necessary to rebuild your home to its original state in the event of a mishap, such as a home fire, which is often lower than cash value. Homeowners' policies are based on replacement value, not cash value.
Reason for Increase
Always research the reason for the increase. Generally, if you have seen a significant increase in the value of your home due to developments in the area, such as the construction of more expensive homes near you, it could be that your current policy coverage is enough.
However, if the increase is the result of work you have performed on your home, such as the addition of a new bathroom, the installation of hardwood flooring throughout the home, or an upgrade from laminate to granite countertops, an increase in coverage may be necessary.
When in Doubt
If you are unsure about whether you need to increase your coverage, speak with your insurance company; do not contact an appraiser. An appraiser will only give you a value that is aligned with the cash value of the property.
However, the insurance company will ask specific questions about your home, such as the square footage, the materials inside, and the value of your belongings, to determine an accurate replacement value to ensure you have the coverage you need.
An insurance agent will be more than happy to sit down and discuss policy options with you if the value of your home has increased. Contact a professional home insurance agency to determine the best coverage for your house.