Home insurance is one of those things that is extremely misunderstood but extremely important to understand. Why? Because it is not finite. It will need to change and adapt to the value of your home so that you aren’t covering more than necessary or covering less than necessary.
With the changing markets, many people are being told that their homes are now worth a few thousand dollars more or less than they were upon the initial purchase. Excellent, time to change your insurance, right? Not exactly…
Here’s the deal: your home is not insured based on what it would cost to buy it if it was up for sale again. Market value has nothing to do with home insurance. What matters is replacement value. Thus, your home is insured based on what it would cost to replace your home if it was damaged.
Home insurance is deigned to cover the value of rebuilding your home the exact way it is now if the absolute worst were to happen, such as your home being burned to ashes in a fire. Your home insurance would cover things like tearing down walls, removing debris, the cost of labourers and the materials required to remake everything. It also covers any lost or damaged personal items, such as musical instruments or kitchen appliances.
So, the replacement value of your home will not go up and down with changes in the real estate market. If the real estate market plummets, your home insurance won’t plummet. The only major thing that affects home insurance is fluctuation of replacement material costs and any renovations.
The cost of labour, materials, machinery and tools all fluctuate quite regularly. Some are minor fluctuations that need not be accounted for, but others require you pay close attention. Things such as window replacements or painting a room will not affect your home insurance. Other renovations, such as new, marble countertops, flooring, basement development, etc. will seriously affect your home insurance. Make sure it is added to your plan immediately.
For more information on this, check out AMA’s article HERE. Make sure your property is covered sufficiently!
Homes are very, very valuable.
Your Real Estate Professional,