Buying a home (especially if it's your first) is exciting, stressful and often confusing.
Once you have made your choice and your offer has been approved, your next call will be to your Ohio homeowners insurance agent to get your insurance started.
But imagine your surprise when you learn that the $$$ you paid to buy the house is NOT the same $$$ that the insurance company will use to insure it. Va? Why is it like that? And how does IT work?
For the majority of homeowners insurance companies in Ohio, insurance companies use REIMBURSEMENT COSTS for the amount of home coverage.
What you pay for the house is called the market value.
What is the difference between market value and replacement cost?
Market value is the price that a house will sell within a reasonable period of time. As you can imagine, this is a subjective figure, based on supply and demand and general real estate market conditions.
The replacement cost is objective based on cold, hard facts. It is the cost of repairing or rebuilding the house just as it is based on the characteristics of a home. Examples are:
• Built in
• House style
• Square film
• Basic type
• Number of bathrooms and type
• What the walls are made of
• What is on the floors
• All connected structures, such as a garage or deck
OK, so the market value seems easy enough to calculate. But how do you calculate the replacement cost?
It is often a combination of visiting the property, or if it is not possible, we get information from the property card and the property list.
We connect the information we collect to special software and the software calculates the replacement cost.
So why should I insure my house for compensation costs?
I guess because the insurance company said it's not a really good answer ….. .. but it really is the answer.
However, there is also another answer that shows why insurance companies like to use compensation costs for housing coverage (and why you should too).
Imagine for a moment that insurance companies used the market value to determine the amount of housing when the new insurance is written. BUT that amount can change based on market conditions (much like real estate prices).
So at the time of new policy, your housing coverage is $ 250,000. But after 6 months, the real estate market has deteriorated and your house is now worth $ 175,000, so the housing coverage is also adjusted to $ 175,000.
And then the claim happens. And you have $ 225,000 in damage. But your housing coverage is now $ 175,000. Do you see a problem with this statement? And would you be happy with the result?
Using an objective number as replacement costs removes the potential for wild fluctuations, such as what you have with the real estate market. And make it much more likely that you will be happy with the claim.
So now that we've determined the cost of compensation as the total amount of housing for an Ohio homeowners insurance policy, we're moving on to any liability if you still choose to insure your home (if you can).
What happens if I do not have enough insurance in my house?
Then there is a good chance that you will be upset when a claim is paid.
So not only do homeowners insurance not use market value. and use compensation cost for the housing cover, BUT you must also insure a certain percentage of the compensation cost. This is called the insurance value clause.
Example: Your home has a replacement cost of $ 250,000. According to the policy, it is permitted to insure 80% ($ 200,000) and not have penalties for damages.
Who, what do you mean by a punishment?
Yes, it is called a co-insurance penalty and has resulted in many unhappy people when damages occur. Here's how it works …..
Using the house from the example above, we know that $ 200,000 is the lowest that homeowners can afford. However, you are about to insure yourself for $ 150,000 for "that's what the house is worth!"
The statement happens. That's $ 100,000 in damage. From here, it is a simple math problem on the part of the insurance company to decide how much to pay for the claim.
Insurance taken out
———————- X Loss = Payment
This is how it works with the numbers above:
$ 150,000 (what you insured for)
———— X $ 100,000 = $ 75,000 payment
$ 200,000 (minimum 80% required)
And where does the remaining $ 25,000 come from? It's called self-insurance, which means you have to pay it out of pocket. And yes, this can and will happen.
We hope this post helps you understand the difference between replacement cost and market value, why replacement cost is so important and the penalties for not having enough insurance in your home. A qualified insurance agent can also help explain these concepts and make sure you have the right insurance and the right amount so that you do not have problems with damages. Do you want to discuss your home insurance in Ohio with qualified agents? Call us or fill in our contact form. You can also request a quote for homeowners quickly and easily. We're here to help!
New home purchases normally include a mortgage with a bank. Here are some popular (and helpful) blogs about mortgages and insurance …….
What is a mortgage account and how does it work?
Why did the payment of my mortgage increase?
Top Two Homeowners Insurance Problems When Your Mortgage Lender Changes
I Paid Off My Mortgage. Do I need to tell my insurance company?