Whether buying a new home of just refinancing, your mortgage company will require you to carry homeowner’s insurance on the property. Over the last twenty years, as a licensed Pennsylvania Property and Casualty agent, I have found there is often a discrepancy between the amount of insurance that you, as a homeowner, believe you should have, the amount the mortgage company wants you to have, and the amount that your home should be insured for. Many folks want to insure their home for the appraised value, also known as the market value, which is what you could probably sell the property for right now. The mortgage company will more than likely ask you to have the property insured for at least the mortgage amount. Unfortunately these amounts have nothing to do with the amount of coverage you actually need.
A homeowner’s policy covers physical damage to the building, other structures and contents. It does not cover the land. If your home sustains a total loss, for example from a fire, the land will still be there. For this reason the amount of coverage that you should carry on the property should be the replacement cost of the building. The replacement cost is determined by many factors including the year built, construction materials and the square footage of living space. Most insurance agencies and companies use the Marshall & Swift/Boeckh residential replacement cost estimator to determine how much it would cost to rebuild your home in the event of a total loss. This estimate should have been done at the time of your original application for homeowners insurance and every 5 to 10 years thereafter due to inflation guard, an automatic increase in the dwelling coverage at policy renewal every year. Inflation guard is meant to keep up with the increase in costs of materials and labor over time. These increases can get out of hand and for this reason a new replacement cost estimate should be done periodically. You must inform your agent if you make any improvements such as additions or finishing the basement, as this will change the replacement cost of your home. Contact your agent if you have any questions or concerns about your coverage.
In short, you could unnecessarily be paying for much more coverage than you really need if you are insuring your home for its appraised value or mortgage amount. The purpose of insurance is to make you whole again, but you can never profit from it, therefore, no matter how much coverage you have, the maximum the insurance company will pay out in the event of a loss is the replacement cost.