Does Real Estate Appreciation Require Higher Homeowner Policy Limits?

Individuals purchase homeowner's insurance to safeguard what is, for many families, the most precious possession. When the real estate bubble burst several years ago, many households experienced considerable losses in home equity. However, home values have increased pretty consistently over the past few years. This raises the question of whether growth in their home's value justifies the purchase of a policy with higher limits and the price hikes that accompany more comprehensive coverage. Increasing property values do not usually necessitate an increase in policy limits.

Market Value vs. Replacement Value

The market value of your property is affected by rising real estate values, including the land's location, view, and value. While these are significant components of your home's resale value, they are irrelevant to the replacement value that your homeowner's policy is designed to cover. The replacement value does not include the land's or neighborhood's worth. When determining replacement value, the cost to rebuild your home from the ground up in the case of a total loss due to a covered danger like a hurricane, fire, or flood must be considered.

Due to the fact that the homeowner's policy will only cover replacement costs in the event of a catastrophic loss, your coverage should be based on the value of the real loss that can be replaced, which does not include payment for the location or plot of land where your home is situated. In addition, many homeowner plans contain provisions known as inflation guard coverage that alter your policy's estimated value by 3-5 percent yearly to account for increases in the value of the real estate market and inflation. However, you should not assume that your policy contains this provision without examining your policy and/or consulting with an insurance company representative.

Instances Where An Increase In Market Value Justifies An Expansion Of Policy Limits

As a general rule, an increase in property value resulting from a fluctuating real estate market does not warrant an increase in homeowner insurance coverage. However, there are occasions in which you may need to examine and change your policy limitations. If you make substantial modifications or additions to the property that affect its market worth, this type of alteration to the property may necessitate a coverage review. When homeowners add an additional bedroom, a second story, or a swimming pool, these additions can substantially affect the home's replacement value to warrant altering policy limits. Similarly, a kitchen might be remodeled with more expensive appliances and materials. This type of renovation may also warrant a recalculation of your home's replacement cost. Increasing construction expenses may also need an increase in coverage. Your insurance agent or broker can assist you in determining the appropriate level of coverage for your home.