Whether you are insuring your home or an investment property, the amount of coverage needed can be confusing because there are so many different valuations to consider.
Should it be:
A. Sales price – what did you pay for the house?
B. Tax valuation – what does the county appraisal district use to calculate your property tax?
C. Loan amount – what does your lender require?
D. None of the above
If you answered D, you are correct!
From an insurance standpoint, the coverage amount should be based on replacement cost – what it would cost to rebuild your home if there was a total loss.
Each insurance company uses some variation of an estimator, primarily based on the living area square footage, number of bathrooms, garage size, exterior construction material, number of stories, roof shape, etc., as well as the grade of building materials used.
One thing that is not used in the calculation is the land value, because in the event of a total loss, the land would still be there.
While of course you don’t ever want to be under-insured, being over-insured has a downside as well. The higher the dwelling value, the higher your deductible will be too, so it is very important to be insured with the proper amount of coverage.
When shopping for insurance, be sure to ask your agent how they came up with the dwelling value, so you can be confident that the property is insured with the correct amount of coverage.
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