When buying Home insurance why insure the land?

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PostPosted: Fri Mar 28, 2008 8:21 pm   Post subject: When buying Home insurance why insure the land?  

The coverage for the dwelling is 327,00(also what we paid for home) but if something was to happen to the home only the home would be covered. The home itself is not worth that amount. If something was to happen and our home needed to be repaired or replace the insurance would only pay for the actual cost to rebuild or replace it according to what it would cost to replace the home on this land. Which would be cheaper. If we were to take the cash value instead then we would be paid only the FMV ov the home excluding the land. We are paying 607.42 for 327,000 worth of coverage when we would never receive that full amount of coverage. Can someone explain this to me because i hope that I am missing something otherwise I think this is fraud.

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PostPosted: Sat Mar 29, 2008 4:10 am   Post subject:   

I'll explain it... IMHO:

It's almost a scam by the insurance companies! Keep in mind that there is a co-insurance clause on your policy that requires you maintain coverage up to at least 80% of your homes value. But I'm willing to bet me left... well you know... that if you were to call your agent and ask them to lower your limits you'd have an easier time trying to prove the big bang theory.

I had something kind of like that happen when I learned State Farm was automatically increasing my limits each and every year. They had increased it _well_ above what the house was worth. When I called and asked, they explained that they just do it. I asked to have it stopped. They seemed not to be able to do this... but of course I could call every year, argue with them for hours and then perhaps they would honor my request to lower the limit.

But here is the flip side... you paid $327k for the house... is this what it would cost to build a _brand new house_ on the same lot? Of course not... it would cost _much_ more then that. Your policy is for replacement cost. So if your house burned down to the ground, your carrier would hand you a check for $327k and send you on your way (valued policy laws would require this). So perhaps $327k is not such a bad limit.

Of course, it's highly unlikely that you suffer a complete and total loss of the home and all it's contents. So it's up to you if you want to hedge your bets and lower the limits. You could see if it saves you any money. Just keep in mind that 80% co-insurance clause.

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PostPosted: Sat Mar 29, 2008 7:14 am   Post subject: Pls help!  

Of course not... it would cost _much_ more then that.

Would I be at a loss if I ask my carrier to support a rebuilding of my home under such a circumstance? Please explain..

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PostPosted: Sat Mar 29, 2008 4:45 pm   Post subject:   

Would I be at a loss if I ask my carrier to support a rebuilding of my home under such a circumstance?
I'm not sure what you mean by that. What I mean was your policy is for replacement cost. If your home was a total loss, your carrier would pay the policy limits (i.e. you could afford to build the exact same house you have now, which would cost _much_ more then what you bought it for... used/old vs new/built)
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PostPosted: Sun Mar 30, 2008 5:33 am   Post subject:   

I have this question come up all the time. I've had it also come up reversed.

The purchase price of your home has nothing to do with the replacement value of a home. A good example is the housing boom in California. There were 1400 square foot homes selling for $1 million. Obviously, there was no need to carry $1 million in coverage to replace the home.

It also goes the other way in some less desireable areas of town when a 2000 square foot home sells for $100k.

Even brand new homes can have a higher replacement cost than what the home sold for. This happens alot because a builder may be building 200+ homes in a neighborhood, off only 4-5 different sets of plans and buying material in bulk. Take that same home 5-10 years later and the builder has finished that neighborhood and moved on. Now, the process of rebuilding your home looks like this:

    The home has to be torn down and the debris has to be cleared from the lot.

    The foundation has to be cleared and repaired to accept the new home to be built.

    New plans have to be drawn up by a custom builder, since the original builder may not care to come back to that neighborhood to build 1 home.

    The materials have to be purchased, most likely at a higher cost than originally, the way building material prices are increasing.

    The home is then rebuilt.

Generally, the annual increase is calculated with trends in the increased cost of labor and materials. I do recommend a new calculation be performed every few years to keep it in check though, since it's generally a standard percent applied to everyone.

Now, to explain the reinsurance clause. To insure your home for the 80% of the calculated replacement cost would be foolish, by both the insured or the insurance company.

For the insurance company:

Insuring a home for 80% of the value, knowing that you would have to pay for 100% of the rebuild cost is not good business sense.

For the insured:

Say you calculate the replacement cost at $200k and insure it for $160k(80%). The home burns down and costs $210k to rebuild. You are now, technically insured for 76% of the cost to rebuild, not meeting the 80% co-insurance clause. You are now self insuring 24% and your insurance company is responsible for 76% of the cost to rebuild.

What the coinsurance clause was meant to do is keep the insurance company from saying the home was insured for $200k and it really cost $210k so they are not paying the extra $10k. Since you do not know the actual cost to rebuild until it is time to rebuild, this protects the consumer.

I actually had a customer whose home burned down and the dwelling coverage amount was much less than the actual cost to rebuild. The company tried to pay limits and say he was stuck with the rest. Going back on our paperwork, we found the original valuation the company's inspector drew up and showed that the insured covered the house for 100% of what the company calculated. The company ate the loss and paid around $100k more than the replacement cost.

In the situation where the insurance company calculates your replacement, the insured will always have a case against the insurance company if the calculations are wrong.
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