Thoughts on home insurance and land vs structure value

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Admiral
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Thoughts on home insurance and land vs structure value

Post by Admiral »

My home value has increased quite a bit (market value, anyway) such that I am insured (including replacement value of contents) for about $500k but the market value of the home is probably more like $700-800k. Historic home.

I have always felt that the market value reflects the market value of the land/location, not just the structure. This is a city plot that is 20'x100'. So, I did not deem it necessary to insure up to the (assumed) market value; this would raise my premium quite a bit.

Does this seem like a proper way to go about this? If the house burns down, the $500k strikes me as enough to rebuild (1,900 sq.ft at a rebuild cost of maybe $250 sq. ft.)
Rupert
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Re: Thoughts on home insurance and land vs structure value

Post by Rupert »

Insured value is based on cost to rebuild. It has nothing whatsoever to do with market value. What does the insurance company say the insured value of your home is? That's what's important because if you under-insure by more than 20%, i.e., if you don't insure your home at a level that is at least 80% of what the insurance company determines the insured value of your home is, then you will pay a coinsurance penalty when you file a claim. For example, if the insurance company says the insured value is $100,000, and you decide to insure for only $50,000 (50% of its value as determined by the insurance company), then the insurance company will penalize you 50% on every claim you file, including partial claims. So if you have a little kitchen fire that causes $20,000 damage, they'll only pay you $10,000 (minus your deductible of course). Sometimes the coinsurance penalty will instead involve paying you actual cash value, rather than replacement cost, if you under-insure. Read your policy carefully.

Edited to add this: You say your home is historic. There may be historic district or historic home regulations in effect that would significantly increase the cost of rebuilding your home. Make sure you discuss this with your insurance agent. I pay for an additional rider (I think it's called a "regulatory rider") on my HO policy because I live in a historic district and would have to comply with stringent regulations re types of materials that can be used to rebuild my home (only solid wood windows, no vinyl or cement board siding, etc.). The algorithm an insurance company typically applies to determine insured value wouldn't capture those additional costs.
Last edited by Rupert on Fri Oct 13, 2017 12:20 pm, edited 1 time in total.
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dm200
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Re: Thoughts on home insurance and land vs structure value

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Admiral wrote: Fri Oct 13, 2017 11:53 am My home value has increased quite a bit (market value, anyway) such that I am insured (including replacement value of contents) for about $500k but the market value of the home is probably more like $700-800k. Historic home.
I have always felt that the market value reflects the market value of the land/location, not just the structure. This is a city plot that is 20'x100'. So, I did not deem it necessary to insure up to the (assumed) market value; this would raise my premium quite a bit.
Does this seem like a proper way to go about this? If the house burns down, the $500k strikes me as enough to rebuild (1,900 sq.ft at a rebuild cost of maybe $250 sq. ft.)
I have gone through this several times over the last 38 years.

Go to your insurance company/agent and get a "replacement value" for the house. No sense, in my opinion, to pay for insurance you can not collect.
afan
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Re: Thoughts on home insurance and land vs structure value

Post by afan »

The market value is not much of a guide. You need your insurance company to estimate the cost of rebuilding your house. Unless you are a builder yourself it could be hard for you to come up with a reliable figure. You would have to take into account current building codes, costs of material and the kind of labor required. For an older house you might have features that once we're common but are now quite expensive. Custom woodwork, for example. Hardwood floor vs carpet. Granite vs vinyl flooring. Rebuilding your house as it is might be a lot more expensive than simply putting something up. You might opt for lower cost construction but sacrifice market value at resale.

We have an older house and had to go through it top to bottom with the insurance company to account for these details. Their estimate was then based on rebuilding the house we have, not simply putting up a place of the same size.

It is entirely possible that rebuilding the house would cost more than the market value. Particularly for an older or historic home.

At least in my area, historic district rules apply to the outside. One may be restricted in changing the appearance from the curb, but you could redo the interior to your heart's content. But buyers in my area value things like that woodwork and those floors, so it would be foolish to waste that appeal.
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afan
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Re: Thoughts on home insurance and land vs structure value

Post by afan »

Rather than underinsure the cost of rebuilding, we save money by carrying a large deductible. Having never filed a claim, we knew we are only concerned about big loses, like a major fire. If our house suffers smaller damage it would not be a hardship to just pay for it ourselves, so no reason to insure.

Since, I gather, many claims are smaller, eliminating them from the insurance company's risk made the premiums much lower. If the house burns down they will still pay to rebuild- which is a lot of money. We would be on the hook for a large amount but not more than we can afford.
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dm200
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Re: Thoughts on home insurance and land vs structure value

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afan wrote: Fri Oct 13, 2017 2:13 pm Rather than underinsure the cost of rebuilding, we save money by carrying a large deductible. Having never filed a claim, we knew we are only concerned about big loses, like a major fire. If our house suffers smaller damage it would not be a hardship to just pay for it ourselves, so no reason to insure.
Since, I gather, many claims are smaller, eliminating them from the insurance company's risk made the premiums much lower. If the house burns down they will still pay to rebuild- which is a lot of money. We would be on the hook for a large amount but not more than we can afford.
As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
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Earl Lemongrab
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Re: Thoughts on home insurance and land vs structure value

Post by Earl Lemongrab »

dm200 wrote: Fri Oct 13, 2017 2:24 pm As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
Does that have a bottom on it? Otherwise it might be a good deal depending on circumstance. A windstorm that did 10k damage to your roof would only be a $100 deductible. Unless it's really $1000 or 1%, whichever is higher.
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dm200
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Re: Thoughts on home insurance and land vs structure value

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Earl Lemongrab wrote: Fri Oct 13, 2017 3:30 pm
dm200 wrote: Fri Oct 13, 2017 2:24 pm As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
Does that have a bottom on it? Otherwise it might be a good deal depending on circumstance. A windstorm that did 10k damage to your roof would only be a $100 deductible. Unless it's really $1000 or 1%, whichever is higher.
What do you mean by "bottom"?

We have never had a claim. Many decades ago, the deductible was a fixed dollar amount (cannot remember). Then, when the 1% became or available (or I learned about it), we went to that to save premium.

Our house is now insured for about $250,000 (down from about $350,000 before I used the State farm agent's replacement value calculations). That means any of the claim categories subject to the deductible would need to be a claim of over $2,500 to collect anything. The higher deductible lowers the premium amount as well as reduces the filing of claims that would (or could) cause existing premiums to go up.
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Re: Thoughts on home insurance and land vs structure value

Post by Rupert »

Earl Lemongrab wrote: Fri Oct 13, 2017 3:30 pm
dm200 wrote: Fri Oct 13, 2017 2:24 pm As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
Does that have a bottom on it? Otherwise it might be a good deal depending on circumstance. A windstorm that did 10k damage to your roof would only be a $100 deductible. Unless it's really $1000 or 1%, whichever is higher.
It's 1% of the insured value of the home, not 1% of the claim amount. So if the insured value of your house is $100,000, your deductible is $1000. And for wind storms, at least in areas frequently affected by hurricanes and tornadoes, there's usually a much higher wind deductible -- 5% of the insured value of the home is common in my region. I've heard of 2-3% wind storm deductibles in some other places.
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dm200
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Re: Thoughts on home insurance and land vs structure value

Post by dm200 »

It's 1% of the insured value of the home, not 1% of the claim amount. So if the insured value of your house is $100,000, your deductible is $1000.
Right...
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Re: Thoughts on home insurance and land vs structure value

Post by Earl Lemongrab »

dm200 wrote: Fri Oct 13, 2017 3:54 pm
Earl Lemongrab wrote: Fri Oct 13, 2017 3:30 pm
dm200 wrote: Fri Oct 13, 2017 2:24 pm As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
Does that have a bottom on it? Otherwise it might be a good deal depending on circumstance. A windstorm that did 10k damage to your roof would only be a $100 deductible. Unless it's really $1000 or 1%, whichever is higher.
Our house is now insured for about $250,000 (down from about $350,000 before I used the State farm agent's replacement value calculations). That means any of the claim categories subject to the deductible would need to be a claim of over $2,500 to collect anything. The higher deductible lowers the premium amount as well as reduces the filing of claims that would (or could) cause existing premiums to go up.
The deductible is 1% of the total insured value for ANY claim, rather than a 1% of the claim amount?
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Re: Thoughts on home insurance and land vs structure value

Post by afan »

Then1% is a formula for calculating the dollar value of the deductible. Once calculated, then the dollar value is the deductible. The deductible would be the same for a claim of $1,000, a claim of $10,000 or a claim of $100,000.
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Re: Thoughts on home insurance and land vs structure value

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Earl Lemongrab
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Re: Thoughts on home insurance and land vs structure value

Post by Earl Lemongrab »

soupcxan wrote: Fri Oct 13, 2017 7:58 pm
Earl Lemongrab wrote: Fri Oct 13, 2017 3:30 pm
dm200 wrote: Fri Oct 13, 2017 2:24 pm As I believe is increasingly common, our homeowners deductible is 1% of the insured amount. When we recently decreased the insured value, our deductible went down as did our annual premium.
Does that have a bottom on it? Otherwise it might be a good deal depending on circumstance. A windstorm that did 10k damage to your roof would only be a $100 deductible. Unless it's really $1000 or 1%, whichever is higher.
I don’t think you're familiar with how deductibles work.
I'm familiar with how the traditional deductibles work. I am not familiar with how these percentage ones work. That's why I asked. How was your comment in ANY way helpful?
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Re: Thoughts on home insurance and land vs structure value

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afan wrote: Fri Oct 13, 2017 7:36 pm Then1% is a formula for calculating the dollar value of the deductible. Once calculated, then the dollar value is the deductible. The deductible would be the same for a claim of $1,000, a claim of $10,000 or a claim of $100,000.
So it's 1% of what figure? The rebuild cost of the house? The market value? I've only had the flat deductibles, so I am curious as to what it's 1% of.
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Re: Thoughts on home insurance and land vs structure value

Post by Rupert »

Earl Lemongrab wrote: Fri Oct 13, 2017 11:40 pm
afan wrote: Fri Oct 13, 2017 7:36 pm Then1% is a formula for calculating the dollar value of the deductible. Once calculated, then the dollar value is the deductible. The deductible would be the same for a claim of $1,000, a claim of $10,000 or a claim of $100,000.
So it's 1% of what figure? The rebuild cost of the house? The market value? I've only had the flat deductibles, so I am curious as to what it's 1% of.
It's 1% of the insured value of the house, i.e., the maximum the insurance company would pay you or spend to rebuild your house if your house was a total loss. That number should be prominently featured on the first page of your HO policy.

Insured value is based on rebuild cost, not market value. Insurance companies have proprietary algorithms they use to determine what that number is. It's based on local conditions, i.e., what it typically costs to build a house like yours in your community at this time. It's an estimate, of course, but nevertheless is usually non-negotiable. You can choose to underinsure, i.e., insure for less than the figure the insurance company says should be the insured value, but at some point you run into that coinsurance penalty that I mentioned up-thread. Usually coinsurance clauses are triggered at 80%, i.e., if you underinsure by more than 20%, the insurance company will penalize you when you file a claim.
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Earl Lemongrab
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Re: Thoughts on home insurance and land vs structure value

Post by Earl Lemongrab »

Rupert wrote: Sat Oct 14, 2017 8:46 am
It's 1% of the insured value of the house, i.e., the maximum the insurance company would pay you or spend to rebuild your house if your house was a total loss. That number should be prominently featured on the first page of your HO policy.
That certainly makes that number more important, as it can affect more than just a total loss.
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Re: Thoughts on home insurance and land vs structure value

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Rupert wrote: Sat Oct 14, 2017 8:46 am
Earl Lemongrab wrote: Fri Oct 13, 2017 11:40 pm
afan wrote: Fri Oct 13, 2017 7:36 pm Then1% is a formula for calculating the dollar value of the deductible. Once calculated, then the dollar value is the deductible. The deductible would be the same for a claim of $1,000, a claim of $10,000 or a claim of $100,000.
So it's 1% of what figure? The rebuild cost of the house? The market value? I've only had the flat deductibles, so I am curious as to what it's 1% of.
It's 1% of the insured value of the house, i.e., the maximum the insurance company would pay you or spend to rebuild your house if your house was a total loss. That number should be prominently featured on the first page of your HO policy.

Insured value is based on rebuild cost, not market value. Insurance companies have proprietary algorithms they use to determine what that number is. It's based on local conditions, i.e., what it typically costs to build a house like yours in your community at this time. It's an estimate, of course, but nevertheless is usually non-negotiable. You can choose to underinsure, i.e., insure for less than the figure the insurance company says should be the insured value, but at some point you run into that coinsurance penalty that I mentioned up-thread. Usually coinsurance clauses are triggered at 80%, i.e., if you underinsure by more than 20%, the insurance company will penalize you when you file a claim.
I actually over-insured a couple of my properties during the recession. I knew I was paying more than I needed to but I knew what happened during the huge wildland fires that hit San Diego in 2004. You have contractor and material shortages and the prices can go up far more than the 20% buffer allowed by the insurance company. When my agent called me about it (apparently over-insuring is a red flag for arson) I explained why I was doing what I was. Given that we had only filed one claim in 20 years (my husband hit a golf ball and dented a fellow golfer's roof) I gather that we didn't have the typical arsonist's profile.

We'll see this play out with the N. California fires. We were already seeing contractor shortages before the fires due to our robust economy. The scale of this destruction is historic. An article in the S.F. Chron stated that it will take 10 years for the area to recover and I believe them.
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dm200
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Re: Thoughts on home insurance and land vs structure value

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Earl Lemongrab wrote: Sat Oct 14, 2017 10:06 am
Rupert wrote: Sat Oct 14, 2017 8:46 am It's 1% of the insured value of the house, i.e., the maximum the insurance company would pay you or spend to rebuild your house if your house was a total loss. That number should be prominently featured on the first page of your HO policy.
That certainly makes that number more important, as it can affect more than just a total loss.
For partial losses, I believe to be fully paid/reimbursed - the house must be insured to something like at least 80% (perhaps more) of replacement value. I felt very comfortable going with the State Farm full replacement (according to their calculator) value using the "middle" quality level.
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Re: Thoughts on home insurance and land vs structure value

Post by GreenGrowTheDollars »

I have a historic home, and the detailed calculations of replacement cost were signficantly higher than for newer homes in my area. Lathe & plaster, 14' ceilings, old windows, .... If the home burned to the ground then I'd have a lot of excess insurance, but the bigger risk (to me) is a significant partial loss, because rebuilding that would require that I meet extensive and expensive standards as well as upgrade quite a few items to current code.

One other observation -- in the big fire in northern San Diego county about 10 years ago, many burned homes even had their concrete slabs/basements destroyed because of the heat. Apparently quite a few insurance company estimates from that time always assumed that your home could be rebuilt on the existing basement/slab. It turned out that a lot of folks were massively underinsured for the losses. I probably over-insure, but I do sleep better.
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Re: Thoughts on home insurance and land vs structure value

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GreenGrowTheDollars wrote: Sat Oct 14, 2017 12:44 pm .

One other observation -- in the big fire in northern San Diego county about 10 years ago, many burned homes even had their concrete slabs/basements destroyed because of the heat. Apparently quite a few insurance company estimates from that time always assumed that your home could be rebuilt on the existing basement/slab. It turned out that a lot of folks were massively underinsured for the losses. I probably over-insure, but I do sleep better.
This is a good point. The heat generated by these firestorms is so great that it wouldn't surprise me if all of the infrastructure normally protected by a concrete slab would have melted/cracked and would have to be replaced as well adding further to the costs.
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