Home insurance question.... (buy, sell, companies, make money)

[katzenfreund]

Hi ...
ok, so last year we bought a home and were in a big hurry to purchase home insurance, which my husband set up. We just received our renewal policy and the rate we are paying seems really high to me. The home was purchased for $230.000 (before the big drop ) and sits on a 0.6 acre lot. When I look at our policy it says the home is insured for $340.000, this does not include liability or the belongings in the home, just the structure itself. I called the insurance company, because to me this seems stupid. Why would they say it will cost $340.000 to rebuild this house, when I can buy a new home, on a lot for $230.000???? Doesn't make sense to me.... are there any "experts" out there that have an explanation that does make sense ?

[chet everett]

Insurance that is for "replacement cost" is based on formulae that factor in the size, age, quality of the home and local material/ labor costs. You might be wise to shop the total premium at other insurers, but worrying about the value of the replacement cost is not going to save you money...

[greggd]

Originally Posted by katzenfreund

Hi ...
ok, so last year we bought a home and were in a big hurry to purchase home insurance, which my husband set up. We just received our renewal policy and the rate we are paying seems really high to me. The home was purchased for $230.000 (before the big drop ) and sits on a 0.6 acre lot. When I look at our policy it says the home is insured for $340.000, this does not include liability or the belongings in the home, just the structure itself. I called the insurance company, because to me this seems stupid. Why would they say it will cost $340.000 to rebuild this house, when I can buy a new home, on a lot for $230.000???? Doesn't make sense to me.... are there any "experts" out there that have an explanation that does make sense ?

Insurance Companies use the cost to re-build the existing structure as their guideline not the market value. If your home burns, they are obligated to re-build the structure itself. Here in California the minimum is usually about $170.00 per square foot. That sq ft cost will vary dramatically depending on the area/State you reside.

Had your home value increased to 500k, they would still only pay 340k because that is the cost they estimate it will take to rebuild the structure.

In todays market, the cost to re-build can very well be more than the cost to buy a similar home. If that is the case and your home burns down. Take the check and buy another home. You dont have to re-build, but they wont pay you the full value of the policy. (actual cash value is paid if you don't rebuild)

[katzenfreund]

Thanks for the explanation....
I guess what gets me is if I can buy a new home for $230.000 same size - how they can they say it will cost $340.000 to replace the structure, since the builders are most likely at least breaking even...

I admit, I know don't know how all this works

[Filet Mignon]

Originally Posted by katzenfreund

Thanks for the explanation....
I guess what gets me is if I can buy a new home for $230.000 same size - how they can they say it will cost $340.000 to replace the structure, since the builders are most likely at least breaking even...

I admit, I know don't know how all this works

There have been some really good and knowledgeable answers given here.

That said, do some shopping around. Get some apples to apples quotes. YOU are the consumer, and these insurance companies are in competition for your business and money. Treat them that way! Not to be rude, but they are not in it for you. They're in business to make money. And you're in the business of saving money.

Keep in mind that if you have a car (or cars) you really should work them in on the same policy, because most insurance companies will give you pretty significant discounts for that.

I'm currently with State Farm Insurance, because when it was all said & done, they had the best coverages and the best rates for me. But in my case, that includes multiple vehicles and multiple houses.

Good luck!

[Houston3]

Originally Posted by katzenfreund

Thanks for the explanation....
I guess what gets me is if I can buy a new home for $230.000 same size - how they can they say it will cost $340.000 to replace the structure, since the builders are most likely at least breaking even...

I admit, I know don't know how all this works

Insure you home for market value and get replacement insurance on it. Even if it cost 400 thousand to rebuild the replacement will pay for it. I just used the replacement on my home for hurricane IKE.

If your home is only worth $230.000 and you have it insured for $340.000, you are paying to much for insurance.

And NEVER buy insurance from who financed your home.

But you really need to check with your state insurance board on all of this. I guess it varies state to state.

[humboldtrat]

Originally Posted by katzenfreund

Thanks for the explanation....
I guess what gets me is if I can buy a new home for $230.000 same size - how they can they say it will cost $340.000 to replace the structure, since the builders are most likely at least breaking even...

I admit, I know don't know how all this works

It should cost less than $230 to replace your home. Part of the purchase price when you bought your home included the land the house stands on. Even the foundation would be left if the house burned to the ground.

If you have a older home, they also take into consideration the cost of rebuilding the house up to today's building codes.

Having a bigger deductable will also lower the premiums.

[chet everett]

The formulae does not care what the builders SELL homes for -- they often DISCOUNT material and even labor far below prevailing rates. The "replacement cost" matters a lot less than what the PREMIUMS are -- compare what different insurance companies will charge to offer "replacement cost" insurance and that is what you should shop!

[greggd]

There is a bit of confusion going on here.

The cost to replace a home is different than the "market Value".

Market value is the current price you can sell/buy the home for.

Replacement cost value is the current cost it would take for you, as an individual, to hire a contractor to rip down the damaged structure and re-build it. Not how much a developer can do it for, but the cost for you as a homeowner building just one house by one contractor.

Many insurance co's will sell a replacement cost policy but the house can still be underinsured. They will offer replacement cost up to the amount listed on the policy. You need to make sure they include what is called both replacement cost (as opposed to actual cash value) and "extended replacement cost" that will pay a % above and beyond the amount you buy, and will cover any changes in replacement cost or unforseen additional expenses in the reconstruction.

Market value should not be a factor.

[katzenfreund]

Thanks for all the advice - I really appreciate it!