Homeowners and Insurance: When Can You Receive More Than You Paid for Your Home?
Have you ever wondered if, in the rare event of a total destructive disaster like a fire, you might receive more money from your insurance than initially paid for your home? The answer is quite straightforward and involves a clearer understanding of how home insurance works.
Understanding Home Insurance Coverage
Home insurance typically covers the cost to rebuild your home rather than what you originally paid for it. This is an important distinction, especially when comparing it to car insurance. Car insurance only pays for the current value or market worth of the vehicle, not the price paid for it, as auto values depreciate over time.
Let's take a closer look at this. Suppose you purchased a house in 1999 for $112,000. By this year, the value of that house has appreciated to $270,000. If it were to be destroyed by a tornado, the insurance company would cover the cost to rebuild it to its current value, not just provide the original purchase price.
Rebuilding Costs vs. Original Purchase Price
The insurance company would pay you the cost it would take to build a new home identical to the one that was destroyed. Additionally, you would be compensated for the contents inside the home that were lost, such as clothes, TVs, computers, and other items. This ensures that you are not only covered for the structure but also for the house's contents.
As an example, if you paid $40,000 for a new car in 2018 and it was destroyed, the insurance company would only pay you the current market value of a similar car with the same mileage and model year. So you might only receive around $15,000 for the vehicle, reflecting its current value rather than what you paid for it.
Protecting Your Equity
When insuring your home, it is crucial to consider the full market value or replacement cost, especially to safeguard your equity. If insurance is taken through a mortgage holder, it might be limited to the remaining mortgage amount. However, to truly protect your investment, you should opt for insurance that covers replacement costs rather than the original purchase price.
For instance, a property I purchased in 1990 for $107,000 has seen a significant increase in market value to $560,000. If a small fire did $50,000 in damage, and my policy was limited to $107,000, I would face a significant shortfall. Choosing comprehensive home insurance is critically important to align with the value of your property.
Historical Examples of Property Value Appreciation
History also provides us with examples of how property values can appreciate over time. For example, my father purchased a property in 1945 for ￡1,800, which was considered a significant investment at the time. Fast forward to when my mother eventually sold the property for retirement, it fetched ￡150,000. Now, the same property is valued at €1,500,000.
Another personal example is my own home, which I purchased for ￡35,000 and would now fetch a price of ￡750,000 if sold. These examples demonstrate that over time, the value of property can and does increase, underlining the importance of ensuring adequate coverage.
Understanding and properly insuring your home can provide peace of mind and financial security in an unexpected event. Make sure to review your insurance policy to understand the level of coverage you have and whether it aligns with your current property value.
Always remember, the cost to rebuild is what you should be prioritizing in your home insurance policy, not what you originally paid for it. It is never too late to review and adjust your coverage to suit the current market value of your property.