Alert! Lumber prices are 112% higher that this time last year. NOW is the time to review your home insurance policy limits.
Taxed value, appraised value, market value, and replacement cost – what do they mean, and which are important when it comes to home insurance? Each of these values serve different purposes and homeowners need to understand them, their uses, and which ones pertain to insurance.
Carrying adequate levels of insurance protection on a home is imperative. If the insurance policy levels are too low, they may not cover the cost to repair or replace a home. In addition, underinsured claim penalties can be an additional financial burden. Conversely, with too much insurance costs are unnecessarily high. Below are the common values available to homeowners and which ones are important for insurance purposes.
The market value of a home is what most owners think of when considering what their house is worth. It is the price at which a property could be sold on the market today between a willing seller and a willing buyer under all conditions of a fair sale. It includes everything of value to be transferred, such as land, buildings, personal property, and improvements.
But the market value will fluctuate based upon the real estate market. This means a home’s market value will change based on supply, demand, the economy, local conditions, and many other factors. And although market value is good to know, it does not influence the level of insurance a homeowner should carry.
Tax Value or Assessed Value
Counties, cities, and municipalities impose property taxes on homeowners. These tax jurisdictions manage the tax rates and the systems used to assess the properties. Tax assessors review property information from previous years and may even visit properties to determine an assessed value. A property’s tax assessment determines its value for taxation purposes, and may not align with market value. For example, in our county, for many years the assessed value of properties was commonly half of market value before the assessor took action to correct it. But similar to market value, tax value has little to do with limits on an insurance policy.
Appraised value is an estimate of the value of a property performed by a certified appraiser. Appraisers often complete inspections on behalf of mortgage lenders. A good appraiser will inspect a home from top to bottom, inside and out. The home’s value is based on a review of improvements to the home, building materials, its overall size, and comparable homes in the area. From there, the appraiser estimates the fair market value for the property at that point in time. Mortgage companies may require insurance policy levels be a minimum of appraised value to protect their own interests, but this valuation method is still not the best means for a homeowner to determine proper insurance levels.
Insurance policies are designed to repair or replace the damaged property. Replacement cost is the cost to construct an entire building of similar size and quality, using current prices. Think of it as what you would pay a general contractor to rebuild your home. Unlike all other valuation methods mentioned thus far, it does not include the price of land since the loss of a home does not lead to loss of surrounding land.
Similar to market value, economic conditions affect replacement cost. The supply and demand of labor and material costs will cause it to change over time. For example, according to CNBC opens in a new windowlumber prices are currently 112% higher than they were a year ago due to complications brought on by the pandemic. Now is a great time to reassess the replacement cost of your home and adjust insurance policy limits accordingly.
Guaranteed Replacement Cost
Guaranteed replacement cost is always worth mentioning whenever discussing home insurance values. It is a special valuation option available on some insurance policies whereby the insurance company will pay additional costs to repair or replace the home, even if those costs exceed the limits of insurance on the policy. This option provides an extra peace of mind and protects against value fluctuations. This option is not available on all policies, is more common among private client group insurance companies, and typically requires a detailed survey of a home’s construction, location, and special features.
The goal of a homeowner is to carry enough coverage to repair or replace the house, outbuildings, and contents if they are damaged or destroyed. Not only is insuring a home at market value erroneous, but it may lead to carrying too much or too little insurance. Homeowners should
- maintain an accurate replacement cost for their home, and
- update their insurance agent when an addition is planned or renovations/upgrades occur.
Questions on your home insurance? Policies vary, so review it carefully or contact your Bankers Insurance agent. We will help determine your risks and advise how to best cover them. Not a client of ours? Let us earn your business! Each of our clients is assigned a personal insurance agent and provided their email address as well as a phone number that rings right on their desk.