Home Valuation: Why Your Homeowner's Policy Differs from the Market Value

Whether a distant memory or yesterday's ordeal, ultimately, buying your home was worth it. You have a place that's truly your own. And while, over the years, your home's intrinsic value compounds, you can't always say the same for its market value. So when your homeowner's policy comes time to renew, and your provider's valuation outstrips your home's current market value, questions could surface—and then linger.

Why doesn't my insurance provider have it right? Where's the discrepancy? Am I getting a fair shake? Good questions -- Let's get those answered.

It begins with a perception issue. So first off, here's a fact: Market value and your insurance provider's home valuation are different animals. And here's why: Your provider isn't worried about trying to resell your home, or buy property. Instead they're concerned with what it will cost, in the event of a catastrophe, to rebuild your home as it stands today. So what you end up with is the estimated cost of building supplies—from major stuff to minutia—along with the needed labor, haul away, etc. to get your house back up and running. Local ordinances and strict rebuilding guidelines will likely factor in. Does the situation already seem more complex than it originally appeared? You can always count on a snag.

Make Handy Work

This is for you, Mr. Handyman Carpenter, who's customized every room with fancy wood trim and the occasional marble tiles—We love your mad skills. That said, do you have any idea just how much value you've added to your home, not just aesthetically, but also to the bottom line? Exclusive structural elements, hard-to-find or premium building materials, and extensive customization are gorgeous and make your home yours. But with that sort of specialization comes a naturally higher cost for replacement, not just on parts but also skilled labor.

So, while calling your agent to dish may not be your kneejerk response, maybe it should be. Because for your investment to be protected, its value must be reflected in your policy. So, once you've jazzed up your home, think value, protection, insurance.

But just how can you quantify your home's unique handiwork? Even if you've done the work yourself, it could be a tricky business. Using online calculators you could estimate the going rate for labor and supplies on the work you've done. Otherwise, the home's builder would be an ideal first source. At the time of appraisal you should also be able to request a replacement estimate. And if it's long past all that, your friendly local agent can always help you out. Once you've factored in inflation, you've got a pretty solid number to work with.

Thoroughly Invested

Regardless of your thoroughness in estimating, reporting and generally having it together, things can go wrong—Thanks, Murphy. So, while insurers often require 100% replacement in order to provide coverage on a home, cost of replacement could easily surpass that. Say for instance, the original estimate was off, or inflation wasn't accurately factored in, prices on labor and materials have suddenly and unexpectedly risen, etc. For these common reasons some homeowners opt for guaranteed replacement or add on increased value endorsement.

Put simply, they're buying peace of mind. Let's say your home is valued at $200,000, but because of the above or other factors, replacement will run the insurance provider $225,000 or more. With guaranteed replacement, the deal is pretty upfront: Pay your premiums, and if anything happens to your home, you're guaranteed to have another built, to the standards of your previous home, regardless of cost. Another option gaining popularity with banks when insuring homes is a request for coverage over and above its value. We're talking an estimated 125-150% of the home's valuation. Why? Well, this measure can fill in gaps between estimates and actual cost, and anymore, some banks are requiring the additional coverage.

Cash or Reality Check

So, if you've opted for guaranteed replacement, you can have total peace of mind, because every big or little thing will be handled...right? Well, no, not always. Because even increased levels of coverage can't remove the natural responsibilities that come with homeownership. Like it or not, some aspects of home upkeep are, and always will be, on you. Take roof replacement for example. With estimates on roof life ranging from 20-25 years at the far end of possible, there's no way to get around the fact that if you plan on owning your home long-term you will be replacing the roof. So given the inevitability of roof repair, it's not hard to understand why insurance providers are tending to slap a surcharge on policies if a roof is over 15 years old—if they'll even cover it at all. Here's the good news: If you take homeownership seriously and regularly maintain your roof, it could last longer. And if you're quick to replace it when necessary, you'll generally save on your policy.

While some may find all this precaution to be overkill, it sure beats being underinsured. "Actual cash value" is another coverage option out there, and you'll want to know what you're getting into. Generally a lower upfront cost, actual cash value could seriously let you down in the end. The "actual" in this coverage is what comes back to bite. Key word, depreciation: Computed by figuring the original cost of your damaged home and belongings, then subtracting an amount for "wear and tear". Simply put, if you lose a 10-yr old TV, dining set, roof, house, etc. your claim will award you the value these hold 10 years after purchase, not what you originally paid. Even worse, with actual cash value coverage, all the hard work you've put into your home over the years will no longer hold its value. So you're left with significantly less to refurnish your home, rebuild your life. It's easy to see that expecting your provider to facilitate a quick return to your previous lifestyle may not be a realistic goal. And for the average, everyday homeowner, this could push a stressful situation to the breaking point.

Evaluating Value

It could be a bitter pill to swallow if a catastrophic loss occurs and your replacement coverage won't stretch far enough. And honestly, wouldn't it be a waste of your precious resources to insure only a portion of your home? This is your life's headquarters we're talking about—if this doesn't merit some serious thought, we don't know what does. And likely you'll find that the more you know, the more the issue becomes value over cost, quality of coverage over all else. Sure, with less coverage you may have saved some upfront, but past savings will be the furthest thing from your mind when it comes time to file your claim.