Owning a home is the single biggest investment you’re likely to make in your lifetime. That’s why protecting it and having it insured is so important. Home insurance covers the physical structure of your home and all of your personal items. It also helps to ensure that you are protected in the event of a disaster. One of the main aspects of home insurance is how property value is calculated and relates to the value of the home insurance policy. Here is an inside look at how the assessment of the property by an insurance agency impacts your coverage.
Exploring the Relationship Between Home Insurance and Property Value
Insurance companies determine the value of your home in several ways. Many different variables help decide a home’s value. Some of those variables include your home’s age, location, condition, size, and building materials. There are also a few different types of values assigned to a home: appraised value, assessed value, and replacement value.
Generally, mortgage lenders will designate an appraiser to evaluate your property. The appraisal value helps determine the amount of capital you’ll be able to borrow, as well as the length of the loan. If your home’s appraisal value is very low, you may not be able to get a mortgage.
Governments use the assessed value of your home to determine the amount you’ll have to pay in property taxes. Generally, the assessed value is lower than the appraised value. If something serious happens to your home, the insurance company will look at your replacement value. The replacement value measures the amount it would cost to replace your home and personal items if they are destroyed. Keep in mind that depreciation is not considered.
Replacement value differs from the actual cash value and fair market value of your home. Actual cash value measures the amount it would cost to replace your home as it currently stands. It takes into account the depreciation of your home. The fair market value measures the amount that your home is worth if you put it up for sale in current market conditions.
There are several factors out of your control that may influence the fair market value, such as local infrastructure. Not all of these valuations have a direct impact on your policy, but the goal is to make sure that you aren’t underinsured.
How the 80% Rule Impacts Your Home’s Value
Another factor impacting your home’s value is something known as the 80% Rule. The rule outlines that many insurance companies will not provide complete coverage after your home suffers significant damage unless the current policy adds up to at least 80% of the home’s replacement value. If the total coverage on your home is less than 80%, the insurance company will likely only pay the difference. If there is a gap in replacement value, the company may divide the total amount of coverage by 80%. In this scenario, you may be responsible for paying thousands of dollars out of pocket if a natural disaster totals your home.
How Being Under-Insured Impacts Home Insurance Policy
You may be surprised to learn that more than 25% of homeowners are underinsured. Luckily, there are a few different things you can do to make sure your home is fully covered. While saving money is important, try to avoid paying only the minimum amount for coverage and look for other ways to save. You can save money by bundling your home and auto insurance policies. If you plan to upgrade your home, be sure to notify the insurance company. Adding amenities can increase the value of your home, but you may be left unprotected if something happens without you notifying the insurance company of the changes.
It’s also a good idea to take inventory of your personal items. If you have extremely valuable items, you may need to purchase additional coverage. Look at your exclusions to figure out if you are fully covered in the event of extreme weather conditions. Also, make sure that you have enough liability coverage. Liability coverage protects your assets if you are sued over an accidental injury or damage.
Gaps in Home Insurance Policies
When assessing the value of your property for insurance, do not overlook these variables that are generally not covered by home insurance. Flood damage is not included in a basic homeowners insurance policy and requires an additional policy to insure against. Another factor that can affect your coverage is what is considered damage due to negligence. You have to take care of your home. You are not covered if your home suffers damage due to a lack of regular maintenance. If you reside in a state that is prone to earthquakes, you’ll have to add extra coverage to protect your home against this type of damage.
Choosing the right home insurance policy is one of the most important decisions you’ll make in your life. To get the best coverage, you must be aware of your home’s true value. Contact us at 01 Insurance to learn more about how much homeowners insurance you need for your New York home.