Homeowner’s Insurance and the Recession Have you thought about reducing your homeowner’s coverage because your home is worth less than when you bought the policy? You should resist the temptation.
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The recession of 2007-2009 battered the finances of Americans in three major ways. First, home prices declined substantially in most regions of the US. This significantly reduced the amount of money that Americans can borrow, since, for most Americans, homes are the most valuable asset that they have to use as collateral for a loan. Second, millions of Americans have experienced sharp declines in the value of their 401 (k) plans, stocks, mutual funds and other investments. Third, the unemployment rate remains high, prompting economists and policy-makers to label this a "jobless recovery".
This combination of factors has had a negative impact on income and savings for many households. Cutting one’s homeowner’s insurance coverage to save money in difficult times like these is understandably appealing. The problem is that there is less of a connection between market value and the actual cost of rebuilding a home—which is what homeowner’s insurance is intended to cover—than many homeowners realize.
The market value of a home is largely determined by variables that have little to do with the home itself. The neighborhood, the amount and type of land that the home sits on, the amenities nearby and the quality of the local schools have a large impact on a home’s market value but very little to do with reconstruction costs. A homeowner’s insurance policy for the market value of your home may well leave you underinsured because the home’s market value is not equivalent to the actual cost of replacing the home.
That’s because rebuilding an existing home is more expensive than new-build construction. When rebuilding a home, builders need to carefully avoid existing utility lines, demolish the original structure, remove debris, and work around landscaping and adjacent buildings.
The misconception that market value is equivalent to replacement cost is responsible for many homeowners being underinsured without realizing it. If a homeowner reduces their coverage to save money, they are at even more risk of being underinsured.
So, how do you figure out how much homeowner’s insurance you would actually need to rebuild your home? Talk to your insurance agent. Don’t have an insurance agent? QuoteWizard will give you free, fast quotes from insurance agents in your area. Be sure that your most valuable asset is protected; get a quote today!
