How to Get the Right Insurance for Your Home
When it comes to purchasing insurance coverage for your home or investment property, many people ponder which type of coverage is best: market value or replacement cost? It’s not an easy question, and a lot depends on your specific needs, assets and comfort level. However, there are a few important considerations to keep in mind when speaking with your agent.
Falling home prices are increasingly making market value an attractive alternative to those seeking to save money on insurance premiums. However, price should never be the sole determining factor.
Because market value may currently be less than the cost of replacing, repairing or rebuilding the dwelling, those who wish to remain in their home, rebuild in the same location and/or otherwise avoid having to relocate should seriously consider purchasing replacement coverage instead.
On the other hand, not everyone needs or desires to remain in the same home. In that situation, market value may be perfectly sufficient. For example, an investor or landlord who owns several properties and wishes to reduce the cost of insurance premiums may benefit from a market value policy. Since the current value of real estate is often substantially lower, it may be possible to save money simply by purchasing another property rather than taking the time and money to rebuild in the event of a catastrophic loss. However, even this situation must be carefully monitored since property values and market rates are highly volatile and localized. Home prices can rapidly rise and fall without warning, potentially leaving the investor or property owner underinsured.
Another important consideration to keep in mind when shopping for either market value or replacement cost is the impact of depreciation and the value of the land itself. In most instances, only the dwelling and other buildings or improvements are insured, not the land. If a loss occurs with a market-based policy, the land and depreciation expenses are deducted from the settlement, which is a potentially significant factor for those with older properties. Be sure to speak with your agent about the advantages and disadvantages of each approach to determine the best coverage for your specific situation