Is being 80% insured like being just a little pregnant?

In the mail yesterday was a message from my homeowners insurance company about what is referred to as the 80% to value ratio. The important question is “Do you know what that means?”

 

Just saying “Insurance” is usually enough to get you ignored all night at social events and just putting your insurance policy next to your bed might be better as a sleep aid than medication. But – this 80% to value thing is really important so listen up.

 

Your home owners policy requires that you insure your home for at least 80% of it’s value. The idea here is that if you only insured your home for let’s say 40% of it’s value then why should your insurance company pay 100% of your homes value if it burns down?

 

That makes sense but here is the rub – how do you know if your policy is an 80% to value or not?

 

This is complicated more by what “..80% to value..” is based on. You might think it is based on the appraisal or sale value and subject to real estate values. That would make it really difficult to keep up with. Actually it is based on what the cost might be to replace your home so it is really 80% of replacement cost at the time of the claim.

 

Assume you bought a 1500 square foot home and then you started having children. First you added a bedroom by converting the porch. Then you enclosed the garage and made it two bedrooms and you added a bathroom. From the outside this still looks like a 1500 square foot home BUT inside it has gone from one bedroom to four bedrooms and a new bathroom.

 

We can assume you got building permits for all this (didn’t you?) but did you ever call your insurance agent and tell them the “replacement cost” had gone up? You paid for the new construction as you had it done but years later the cost of material has gone up, codes have changed, and the cost to “Replace” your home has changed. The sale value may have gone down but the cost to replace it has gone up.

 

So after all that remember this – your insurance requires you to insure your home for at least 80% of the cost to replace it. Call your agent and make sure that is at least what you have.

 

For more information, give us a call, 602-381-9900.


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