Insurance coverage often more than home is worth
anteed replacement coverage. When the home burned to the ground, the insurance company paid out $2,000,000 to rebuild the home to the size and quality it was originally.
To avoid this issue, insurance companies will require homeowners to raise their coverage to what the insurance company believes it will cost to rebuild the home.
You might be right that you can rebuild your home for far less than what the insurance company believes it will cost, but their models don’t anticipate each homeowner being able to undertake the rebuilding of the home. The insurance company expects that you will hire contractors, architects and other professionals. As those costs get included in the coverage amount, we see how easy it could be to say that your home’s coverage could be upward of $700,000.
If you want a policy with less coverage, the insurance company can sell you a policy that will cover you up to $500,000 and not one cent more. You’d take the risk that if the costs come in above that amount, you’d have to come up with the money to rebuild the home.
As a side issue, your mortgage lender — if you have a mortgage lender on your home — will require you to carry a homeowners insurance policy of no less than the face amount of the loan you owe to the bank. If you owe $550,000 to the bank, the lender will want to know that you have at least $550,000 of insurance coverage on the home.
If you want to have coverage that will give you enough money to rebuild what you currently have, you’ll need to follow the insurance company’s requirements. That isn’t to say that you can’t shop around for coverage. You may find that the insurance company you’ve had for some time has raised your rates year after year and that their rates are now far higher than what you’d get with a new company. Shop around for insurance coverage every year or every other year to make sure that the insurance premiums are in line with the market.