Insurance Value vs. Real Estate Value

Insurance Value vs. Real Estate Value

When gathering quotes for a new home purchase, many people often assume that the house should be insured for the sale amount, however, this is rarely the case. That makes a version of this one of our most frequently asked questions:

“I paid $450,000 for this house.  Why are you suggesting I insure it for more/less than that?!?!”

Here’s why…

If you were to a buy or sell a home, you and real estate agent would get comps of what similar homes have sold for in the area.  You wouldn’t contact a home builder, ask him how much it would to build that home, and then base your market value on that, right?  It wouldn’t make any sense to do that because the value of the land, the neighborhood and community amenities help to determine the market value.  For example, an 1,800 sq. ft., 3 bedroom, 2 bath house in Beverly Hills, CA is on the market for $2,475,000 million while a like home in Chesterfield, MO is listed for $529,900…  very similar homes with vastly different price tags.

However, when you are insuring a home, you are only protecting the actual structure – not the ground it sits on, the neighborhood, the school district, access to parks or highways etc.  That is why when you purchase home insurance, you are asked questions details about the construction of the home.  The insurance company is solely concerned with the cost of rebuilding or repairing the structure, so insurance rebuilding values are based on the cost of material and labor. It has nothing whatsoever to do with a home’s sale price.

If you insure your home for more than its replacement/rebuilding cost you are paying for coverage you would never see the benefit of, even in a total loss.  If you insure your home for less than it would cost to rebuild it, you are leaving yourself open to a potentially substantial financial loss.

Have questions about your home’s insurable value?  Call us today at 636-536-2229.

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