Is Your Homeowners Insurance High Enough to Replace your Home?

 Like most homeowners, the value of my home dropped about 30% over the last couple of years, so I asked my insurance agent if that meant I could reduce my coverage and get a break on premiums.

He just laughed at me and asked how long I had been living there. When I said 20 years, he did a quick calculation and then tried to smile as he said, "I think we’re going to have to raise your coverage."

It was then that I learned an important lesson. Homeowners coverage should be tied to what it would cost in today’s prices to replace the home, not some intrinsic value that rises and falls on Zillow.

Insurance companies are fairly consistent in this in that they all will tell you that cost of insurance is based on how much money it would take to rebuild your home to its current condition. And that number, they insist, hasn't dropped at all. In fact, in most areas of the country, it has risen for a whole slew of reasons.

The cost of demolition and the removal and disposal of things that can't be reused is rising due to environmental concerns. Labor and lumber and everything else that goes into home construction costs more today than it did 10 or 20 years ago.

Most insurance companies will plug in the data about your home, its size, any special features, etc. and then use a calculator to determine what it would cost to rebuild the home from scratch. It then bases the cost of insurance on that amount.

You can even check to make sure the insurance company did it right by doing your own calculation using an online tool at www.accucoverage.com. The tool costs $7.95 but it will confirm whether your insurance company is charging you what it should. If not, call them on it and if they don’t explain the difference between their calculation and yours, maybe you should find another insurance company.

Other factors that can drive up the cost of home insurance are flood and wind insurance.  The U.S. government underwrites flood insurance and you can get the maximum $250,000 coverage in a preferred-risk area for about $350 a year. Similar coverage costs about $1,500 in a moderate-risk area and more than $2,600 in a high-risk area. Your mortgage company will almost certainly require you to cover the replacement cost of your property up to the $250,000 maximum.

Wind and earthquake insurance are handled differently in the various states that are most affected. You can check out what's available by contacting your state's insurance commission through the National Association of Insurance Commissioners. Or simply call an independent insurance agent, located through the Independent Insurance Agents & Brokers of America.