FINANCIAL PLANNING TIDBITS: A GOOD TIME TO REVIEW YOUR HOME INSURANCE COVERAGE

SUMMARY

The last couple of years of skyrocketing home values and the widespread destruction of Hurricane Ian remind us that it’s always a good time to review your home insurance coverage.

IT NEVER HURTS TO CHECK

In the last couple of years, we have seen incredible inflation growth both in the value of retail real estate across the country and in the cost of supplies and materials. According to Statista, as of September 2022, concrete block is up 14.6% year-over-year (YOY), while lumber is up 9.1% YOY. Asphalt and tar roofing and siding products are up 15.3% YOY. Chances are, if you own a home, its replacement cost has increased since you last updated your home insurance coverage.

Having the right amount of coverage can mean the difference between being made whole and only getting a portion of the value of any claims. Even now, we’re seeing a poignant and immediate reminder to review your coverage in the ongoing impacts of Hurricane Ian. Many people have lost homes and suffered significant damage over large swathes of Southwest Florida, including in Sarasota County. While any changes to your home insurance won’t apply retroactively and most home insurances won’t cover flood damage, the importance of keeping your policy updated has been especially evident.

Even without these indicators signaling a reevaluation is in order, it never hurts to review your coverage on a regular basis, as much as annually. It’s also a good time to reassess your coverage if you have recently done or are in the midst of remodeling. Capital improvements to your property may increase the replacement value of your house, which in turn can require a higher level of coverage. During or before your project, you may want to determine what is covered and what isn’t, such as theft or damage of construction materials or injuries to workers or visitors.

WHY IT’S IMPORTANT TO HAVE ENOUGH

In most cases, an insurer takes into account a couple of different numbers during the claims process: the Coverage A (Dwelling) limit and the replacement cost of the house. Most loss settlements will only be settled at replacement cost if the dollar amount of the Coverage A limit is 80% or more of the replacement cost of the dwelling at the time of the loss. If the coverage is less than 80% of the replacement cost, the payment will either be the larger of actual cash value of the damaged property or a prorated amount:

Figure 1: Home Insurance Coverage Payment Formula

For example, let’s say the replacement cost of your home is $300,000 and your coverage is for $250,000 (83% of the replacement cost), with a deductible of $1,000. If a tree falling on your home causes actual cash value damage of $6,000 but replacement cost damage of $10,000, your insurer will pay the full loss claim of $9,000 ($10,000 minus the $1,000 deductible).

However, if you only have coverage for $200,000 (66.7% of the home’s replacement cost), the insurance company will only pay $7,333.

To reiterate, if you carry coverage of at least 80% of your home’s replacement cost, the insurance company is likely to pay 100% of your qualifying claim after your deductible. If your coverage is for less than 80% of the replacement cost, the amount paid by your insurer will be prorated.

BE READY

It never hurts to review your insurance so you know where you stand, even if you don’t think you will need to update your coverage. If you do talk with your agent or the insurance company directly (some industry experts suggest the latter), document your interactions with the insurer to keep a record of any updates you made to your policy and to have, in worst-case scenarios, evidence of the company’s stated stance if you later need to defend a claim.

We won’t know for some time the full effects Hurricane Ian will have on the regional retail home markets in Florida, but our hearts are with those who have suffered in the face of the storm. It never hurts to be as prepared as possible, and one way to be ready is to make sure your home insurance coverage is adequate.

Natalie Brown, CFP®
Director of Client Services & Financial Planning
Day Hagan Private Wealth

—Written 10.28.2022.

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