Why is my home insured for more than its actual value?

April 2, 2017

Home Insurance

It is a common question we get when insuring homes in Bloomington, IL.  Why am I insuring my home for such a high value when my home was just appraised for much less?  This is a great question for any insurance customer to ask their agent and I appreciate the concern my customers have when wondering if they are insuring their homes properly.  The answer to this common question is your standard homeowners policy is based off of a replacement cost valuation; essentially meaning that should your home be destroyed due to a fire, tornado or some other insurable event, you want your home to be replaced back to the way it was before the claim.  Some of the factors that influence your homes replacement value are things such as supply and demand of building materials, labor prices, recent catastrophic events as well as gas prices. Since some of these factors fluctuate year to year your homes replacement estimate may do the same. 

Most insurance companies do offer market value style policies which insure your home at the current market value.  There are however some down falls to these policies.  First with a market value policy you are insuring your structure at actual cash value; meaning if you have a partial loss, for instance a hail loss on your roof, the insurance company will adjust your claim with depreciation, meaning if you have a roof that is 10 years old, you may only get paid half of what you would normally under a replacement cost policy.  Second a market value policy is typically more expensive than that of a replacement cost policy, meaning in most cases it is just as expensive to insure your home at its full replacement value as it is to just insure it at market value.