Reconstruction Cost Versus Market Value

When buying homeowners insurance, it's important to make sure you get the correct type and amount of coverage.  While it's not especially common for people to have too much homeowners protection, it's not uncommon at all for them to be underinsured.  In fact, according to current statistics, nearly two out of every three homeowners in America (59%) have homes that are underinsured.  It's been found that the average homeowner today only has enough insurance coverage to pay for 78% of the replacement or reconstruction cost of their home if it was to be destroyed by a covered loss such as a house fire.

Reconstruction Cost Versus Market Value

You may be surprised, as many are, that your homeowners insurance protects your home for a greater amount than you thought the property was worth (market value).  If so, you likely have a more realistic amount of protection than those homeowners who are underinsured, as most are.

"A more realistic amount of protection" means enough coverage to rebuild your home to like or original standards at today's costs for labor and materials within your particular geographical area.  This amount represents the actual reconstruction cost.

Unfortunately, most US homes are insured based on a property's market value rather than their cost of reconstruction.  With today's increasing prices for building materials and labor, it's continually becoming more expensive to rebuild a home than it initially cost.  You also have to factor in changes in building codes that require costly upgrades.

Why Underinsuring is so Common

One major concern with homeowners insurance coverage is that policyholders don't periodically update or increase the coverage on their homes.  Whenever remodeling or home improvements are done to your home, you should call up your agent and revisit your policy's coverage. 

Just the fact that building materials and labor costs continue to increase year over year, that annual or semi-annual update to your homeowners policy becomes imperative to ensure you maintain appropriate coverage on your home in advance of any catastrophe.

Additional (Optional) Coverage

When going over your policy specifics during your annual update, you may want to investigate these additional coverages to bring your policy in line with your reconstruction needs:

• Replacement cost coverage
• Building code/ordinance coverage
• Automatic inflation guard
• Extended replacement cost coverage
• Additional living expense coverage

Most policy holders surveyed report that they have not added or are not sure if they've added these important protections.