Home Insurance Costs Not Falling Along with Home Prices
Posted in Home Insurance
July 14th, 2009
By now just about everyone – especially home owners – is aware of the dramatic drop in America’s home values. Many people who bought their homes at the height of the real estate boom paid top dollar for homes that are now worth less than what they paid for. One consequence of this drop is that many home owners are paying home insurance premiums that reflect the price of the home when they bought it – not the price of the home now. Many home insurance policy holders are unhappy with this lack of symmetry because they feel that the decline in the value of their home must mean that it would cost less to rebuild their homes in case of damage or destruction. This is, according to industry experts, a serious misinterpretation.
The cost of insuring a home has almost nothing to do with its market value. That’s because the costs involved in rebuilding a home – from materials and expertise to labor and other factors – is simply not linked to the real estate market. Home insurance is intended to pay for all aspects of the rebuilding process, and so the price of a home insurance policy is going to be linked to home insurance premiums. So, when your home insurance policy estimates the all-important “replacement cost,” what’s being calculated is the cost of materials, debris removal, construction worker salaries, plumbing analysis and implementation, wiring, and roofing, including the cost of the materials and the labor. These factors and more are what go into the actual construction of a home, and home insurance policies generally aren’t linked to the value of the land. Where home insurance policies concern themselves is your physical home. Landscaping, therefore, will most likely not be covered should your home be burned to the ground in a fire except in rare circumstances.
Conversely, home owners can take some comfort in knowing that should their homes increase in value their home insurance premium rates will most likely not rise along with it.