When was the last time you reviewed your insurance coverage? Insurance is something we all purchase but then really don’t pay much attention to it unless we need it. However, it is very important to review your coverages on a regular basis to ensure that when the unexpected does occur you have proper coverage in place to prevent financial disaster. This can be very true when it comes to homeowners insurance.
When it comes to homeowners insurance, the primary coverage is the dwelling coverage as many of the other aspects of the policy are based on this one specific coverage. So let’s talk about what dwelling coverage is and how to determine how much dwelling coverage you need.
The basic description for dwelling coverage is essentially in the event your home burns to the ground, how much would it cost to completely rebuild your home from the foundation up. This value does not include the land the home sits on so you may see situations where the value of your property is much higher than what the dwelling coverage is listed on your policy and that’s okay as long as there is proper dwelling replacement cost coverage in place.
Dwelling coverage is calculated based on a variety of factors such as:
- Square footage
- Quality of materials
- Type of construction
- Current market conditions for materials & labor
This last point is very important. Materials and labor pricing can change over the years as the market fluctuates. As such the costs can go up and down but it’s important to ensure your coverage is sufficient to cover these changes. For example, lets say you purchased a house 10 years ago and at the time, the current dwelling coverage calculations indicated your reconstruction cost would be $500,000. Now let’s fast forward to current. If you or your agent haven’t reviewed that coverage in 10 years and every year the coverage remained the same, you could see a significant gap in the event there was a catastrophic fire in your home which burned it to the ground. After 10 years with market condition fluctuations and inflation, the amount of reconstruction could have easily increased to $800,000. That means if you suffered a total loss and wanted to rebuild your home back to the way it was, you would have a shortfall of $300,000!!
Now the opposite could also happen. Lets say it’s a newer home you purchased last year had your insurance coverage at $500,000. In 2020 we saw a significant increase in the price of lumber and other building materials due to shipping issues and impacts from COVID-19. 5 years later, it’s possible there has been a market correction and lumber prices goes down. This could, in theory, reduce the reconstruction cost of your home and you may not need as much coverage as when you purchased the home. This could lead to reducing coverage as well as your premium.
This is why it is important to review your insurance coverage on a regular basis. If you haven’t done so in a while, I would encourage you to reach out to your agent to review your coverages and ensure you have the right amount in place on all of your policies. If you don’t have an agent, we would encourage you to reach out to us for a free, no obligation, review of your coverages. We may be able to provide you with updated options and provide you with the benefit of having an agent who will perform regular reviews of your coverages and help ensure you have the right coverage all of the time not just at the time of the original purchase.