Can You Afford to Rebuild Your Home?

You took out hazard homeowners insurance when you bought a home and have paid the premiums ever since, so your dwelling is covered in case of disaster, right? That depends on how long ago you got your policy, when you last updated it, and what changes—if any—you have made to the property since then.

Few homes are destroyed, but some are. Others sustain such significant damage to one area that the integrity of the entire structure is compromised and the home must be demolished. Should you ever face a catastrophic loss, you would want your home rebuilt to the condition it was in before the disaster. You would not want to settle for a smaller home or one made with cheaper materials.

Rebuilding costs are constantly going up. If you have been in your home more than three years, chances are the replacement cost of your home now exceeds your homeowners insurance policy’s dwelling limits. If so, you are not alone. According to Marshall & Swift/Boeckh, a leading provider of property valuation data, 58 percent of America’s single-family homes are undervalued for insurance purposes by an average of 21 percent. This is an improvement from previous years, but it means that insurance would cover only about 80 percent of the cost of rebuilding a home. A home costing $300,000 to rebuild would be covered for only $240,000.

The kind of home you own and the reason it had to be replaced can also affect replacement costs. If your home was built on a concrete slab that was severely damaged during an earthquake, flood, or landslide, the rebuilding will begin below ground level, involving plumbing and sewage lines—an extremely costly starting point. If your home is on a raised foundation and the home was destroyed by fire, the rebuilding will likely begin on the old foundation with plumbing and sewage lines intact, saving significant time and money.

The style of your home will also affect the cost of rebuilding. A custom home built in the 1960s or 1970s would be expensive to replace with today’s materials. Any upgrades made to the house over the years—vinyl windows and doors, custom cabinets and countertops, a deck, or pool—will add to the replacement costs. In addition, building codes in your area may have changed, requiring certain upgrades simply to conform to the new rules and raising the replacement cost.

If you have been in your home a number of years, your insured value may be substantially below the replacement cost. Check your policy to see if your policy provides “extended replacement cost,” an amount about 20 percent above the stated coverage. If you have been in your home more than three years, ask your insurance agent to analyze your home replacement cost. Many insurance companies will do this at no charge. Be sure to mention any upgrades you have made to the home. Also find out if your insurance company offers a dwelling coverage escalator that automatically increases the insurance amount each year. This may cost a little more, but it is worth knowing you will be able to afford to rebuild your home.