So I get a call one day from my buddy, Konfused Karl, whose world is coming to an end all because of having to deal with homeowners insurance. Karl was on a search for homeowners insurance, and because he’s friends with half the insurance agents in town, he feels confident he will get a good deal.
Well, along this “way,” he fell prey to the confusion of what value to insure his home for. You see, his wife Lynn told him he better insure their home for the current market value of their property. Okay class, who thinks Lynn’s right? Any hands?
For those of you who raised their hands, sorry, Lynn is wrong. Now Lynn is mad and tells Karl to ask their banker for an opinion and gets the old-fashioned “amount of your mortgage” answer. Good grief! This is wrong, too.
Frustrated, Karl tells Lynn to shut up and let him handle this. He looks at his property tax bill and feels confident he’s found the answer. Class, is Karl right? Lynn is grinning, happy to know that Karl can be wrong, too.
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Poor, poor Karl is ready to pour a drink when he suddenly realizes he should ask the insurance agent instead of assuming. Now we’re getting somewhere.
When valuing your dwelling for insurance, please remember a few things not to do. First, you don’t use market value, or what you think you can sell your home for. This includes land value, and sales price has nothing to do with the actual cost to rebuild or repair just your dwelling. If you buy your home one day and then sell it the next day for quadruple, good for you. Second, you don’t use taxable value. It too includes land value and the taxable value is nowhere close to actual construction cost. Third, you don’t talk to Lynn.
Step out of your home for a moment and give it a good lookover. How much would it cost today to put your home back as it is right now? For those of you who might say, “But I would build a smaller home,” stop it. Don’t even go there. Insurance is meant to repair or replace what you have now. Don’t over-think this. An insurance policy doesn’t use a crystal ball and can’t read your mind. If that were the case I would buy a mobile home and expect the insurance carrier to give me money for the next Trump Tower I was fantasizing about.
The typical method of replacement value is the cost-per-square-foot method. Insurance agents have access to “costimators” that try to help both client and carrier determine if the replacement cost is heading in the right direction. It’s an estimate only, but a good starting point. Contractors and property appraisers are the ultimate in assistance. Can a 1,600-square-foot home be valued at $224,000? Can the same size dwelling be valued at $1,000,000? The answer to both is yes. One may have gold floors and fixtures, and the other doesn’t. Mine’s the latter. Your contractor can give you a good idea of today’s cost per square foot. Cost per square foot can fluctuate just like selling price, but will reflect the replacement value of just the dwelling at today’s cost.
This question deserves a good answer and it should start with your insurance agent.
Andy Gregory, a co-owner and president of Des Champs & Gregory Inc., with offices in Bradenton and Lakewood Ranch. He specializes in commercial property and casualty insurance, can be reached at (941) 748-1812.