This is an excerpt from the article “Why You Shouldn’t Lower Your Home Insurance Coverage When Your Home Value Drops”. For more information, please visit http://homeinsurance.com/blog/2012/01/06/why-you-shouldnt-lower-your-home-insurance-coverage-when-your-home-value-drops/
|It’s a really common mistake and one that can cost a homeowner a ton of money in the event of a total loss to their home. Homeowners across the country see their property values dropping and assume that it’s a good time to lower their home insurance coverage. The problem with this is that your insurance covers the replacement cost of your home NOT the market value.|
The replacement cost and the market value of your home are two very different things. The market value of your home is the price it would sell for in the current real estate market and includes the value of the land that the home sits on. On the other hand, the replacement cost of your home only includes the structure of your home (no land) and is calculated based on current construction rates in your area (amongst other things).
This misconception is even more dangerous now because while home values have dropped significantly over the past few years, construction costs have increased. This has many homeowners believing they are adequately insured while they are actually under-insured.