How can I be underinsured?

Perhaps you are familiar with the T-shirt that asks “How can I be out of money, I still have checks left?”

In a very similar way, the amount your home is insured for has little relation to how much you paid for the home itself.

As far as a mortgage company is concerned, if you have enough coverage to pay off the loan you have sufficient coverage. However, from the perspective of actually replacing the house you may be in for a surprise. The difference is best explained by remembering that you are dealing with two different markets when you purchase a home and when you build a home.

When you by a home, there are a lot of factors that go into the price. What people call market value is determined in negotiation between the owner and the buyer usually with the help of a real estate agent, appraiser and the mortgage company.

When you go to build a home however, you are talking to a contractor and then you are looking a different type of market. Labor and material costs, permits; a whole new world.

In the area I live in, $100 per square foot for building is not an unusual amount to hear quoted. Perhaps a little more, perhaps a little less. So when you have a home that is 1,600 square feet, you get two different values. On the market, you can sell it for $130,000 but if it burnt to the ground, you would need $160,000 to $185,000.

That is the difference. Many people are insured for enough to pay the mortgage but not the cost to rebuild. This puts the client in a difficult position should they lose everything.

What is the difference between the two costs: In the prices I menitoned above,  would you believe $25 to $30 a month?

Contact your insurance agent, make sure you are not underinsured and make any appropriate adjustments needed.  That way, if your house does burn to the ground you can breath a sigh of relief when you realize “I have that covered.”