If you own a house, you will need to have homeowners insurance to cover it. Without insurance, you will be on the hook for the cost of repairs if your house is damaged by fire, wind, hail, or other events.
How much home insurance coverage you need is different than what you paid to purchase your house. But if the monthly premiums you pay for home insurance keep going up each year, you may wonder why your home's insured value seems high.
There are several things you can do if you don't agree with the listed dwelling's value or the estimated reconstruction cost of your home. This is true whether you think it is too low or too high.
No matter what you are paying monthly for your home insurance, it's important to take a look at your coverage and premiums every year. You want to make sure that the insurance value—and the premium you pay—is correct. This will mean that you are not over- or under-insuring your property.
- Many factors other than the market value are part of setting your yearly premium, such as the age and location of the home, and your past claims history.
- Your insurance is about guarding your assets, so if you feel something is off, call your agent to ask questions or ask for a review.
- When your insured dwelling value changes, review how it will impact the rest of the coverage on your policy, such as your personal belongings.
How Can You Change the Home Value of Your Policy?
The only way to know if the value of your insurance is correct is to review the values listed on your policy every year. This will help you make sure that you have the right amount of insurance.
If you think the insured values of your home and possessions are a little low, you can easily get your policy adjusted. You may also be able to add coverages by endorsement.
Or you may feel that your home is overinsured. The problem happens when you look at your insurance policy and feel like your dwelling's value has increased too much over the years. The result is that you now have more insurance coverage than you need.
You may be correct, that your home is being valued too high. But you should also note that two out of three homes in America are underinsured, yet people still think their insurance is too high.
How Do Insurers Set Home Value?
Both new and long-time homeowners can end up frustrated by the cost of home insurance. New homeowners are often surprised to see what their plan costs them. People who have had coverage for a long time get frustrated when the premium they pay goes up while the resale value of their home does not.
If you have a major home insurance claim, you may run into trouble during the claims process. This is more likely to happen if you have underinsured your home. Despite this, many people who own homes look for places to cut costs in their insurance.
Many factors other than the market value of your house are used to decide your annual premium. These can include:
- Costs to repair or replace the building
- The age of the home
- The location of the home
- The number of people living there
- The size of the home
- Your past claims history
Insurance providers keep the exact way they calculate premiums private. Most, though, will use these factors. Some may even use more.
Before you try to adjust the value of your home down, think about other ways to lower the cost of insurance. Start by looking for discounts or think about bundling with your auto insurance.
Why Do Dwelling Values Go Up?
You may decide that your dwelling value (the value insurance places on the physical house) is too high. But to know if that is true or not, you need to know the main reasons this value goes up.
Your dwelling value on your home insurance policy can increase due to one of three factors: inflation, insurance inspection, and the cost of reconstruction.
Your home insurance has a clause to protect you from the costs of inflation. This means that the dwelling insured value always goes up every year by a small percentage.
Over five to 10 years, this inflation increase may become quite large. Because this is automatic, it is not always being checked for accuracy. You may need to review this value from time to time to be sure it isn't overinflated.
From time to time, your insurer may send an evaluator to your house for an insurance home inspection. The inspector will look at the condition of the home. They also will calculate the cost of reconstruction.
Depending on what the inspector finds, they may suggest an increase in the dwelling value to your home insurer.
You may have just bought a new home and are insuring it for the first time. But your agent or insurance broker has already done some calculations.
They used a standard cost tool and basic information you provided them with to decide the insured dwelling reconstruction cost. This is how much it would cost to rebuild your house to the same standard it currently is.
For example, a home with costly finishes and three levels has a high reconstruction cost. The cost to rebuild a one-story house with basic finishes, by contrast, is much lower.
If you do any work on your home while you live there, such as adding new rooms or updating the kitchen and bathrooms, the reconstruction costs go up. This means your insurance will go up as well.
What If You Don't Agree With the Insured Value?
You may think that when an insurance company sends you something, it is written in stone. But the estimate for the reconstruction of your home can be wrong.
The point of insurance is to protect your assets. If you feel something is off, you have the right to call your agent to ask questions or ask for a review.
Many times, if you have a good case to present, your broker or agent will submit your request to the insurance underwriter. They will go through your case and let you know if the value can be changed.
Changes for Inflation
Insurance companies put inflation adjustment clauses into plans. These are to protect you when you insure your home.
The plan is that if you insure your home and then five years later you have a claim, you won't come up short on the amount of money needed to rebuild. The inflation clause makes sure that your insurance keeps up with the cost of inflation.
How accurate this adjustment is depends on whether your home was insured at the right value in the first place. It also assumes that the cost of materials and construction has, in fact, gone up due to inflation since you first insured your home. In some cases, either one of these factors may be off.
When the value of your insurance goes up due to inflation, it is always a good idea to look at your dwelling value using current reconstruction rates. Your insurance representative is in a good position to discuss your dwelling value with you. You may be able to get an adjustment simply by calling and asking questions.
Are There Ways to Negotiate the Insured Value?
Talking to your agent about the value of your home might not get you an adjustment. If you still disagree with the insurance provider's numbers, then you can try to negotiate.
Start with one of these three tactics.
Double-Check the Calculations
Ask your insurance company to double-check their calculations.
Verify the square footage they used. Then compare the cost per square foot they are using with the general standard in your area, according to local builders.
You can always try and negotiate with the insurance company based on these numbers. They may offer you a compromise or alternative solution.
Contact a second home insurance company or even a third. Ask them where they would set the reconstruction cost of your dwelling. They should be able to give you a quote.
If there is a difference in the cost, ask them about it. If all the information is the same as the information your other insurer had, then the prices should be similar because insurers use similar tools to determine costs.
You might choose to change your plan to this new insurer. Or, you can take these numbers to your current agent and see if they will match the rate.
Get an Independent Appraiser
Hire an independent appraiser who is accepted by insurance companies for insurance appraisals. Before you do this, make sure your insurance company will accept the report your appraiser will provide.
The appraiser must use tools and methods that are insurance company approved. You do not want to waste money on this if your insurance company will not even accept it.
An independent appraisal may not get you a lower home value. In many cases, these in-house appraisals will be more accurate than ones done by insurance companies. This means they may result in higher appraisal amounts.
In some cases, they do result in lower appraisal amounts. The difference, though, would rarely be large.
You may want to tell an appraiser before you hire them of the estimate you already have. You can also let them know the cost per square foot your insurer used.
A good local appraiser will be able to tell you off the bat if that's in the normal range. This may save you money and time.
What Are Coverage Requirements and Policy Types?
Insurance companies often offer several types of insurance coverage for homes.
Guaranteed Replacement Cost
Guaranteed replacement cost will insure you to the stated replacement value, plus a certain percentage over the insured dwelling value. This added percentage is for if the cost of reconstruction ends up being higher than expected in the event of a claim. You won't have to pay out of pocket for the extra cost.
Some companies may cap the guaranteed value at 125% of your insured dwelling value. Others may offer a guaranteed replacement, "no matter what the cost."
If you don't know what kind of home insurance coverage you have, read through your policy. If you still aren't clear, you can ask your agent.
Guaranteed replacement coverage usually requires you to insure to 100% of the evaluated reconstruction cost of your dwelling. This coverage is the best kind of coverage because it protects you no matter what. But you also have other less expensive options.
Replacement cost is different than guaranteed replacement cost. It will not pay out more than the insured value for a claim.
If you feel your evaluation is too high, you might not need guaranteed replacement cost. But you should still think carefully before changing your policy.
Will a lesser amount than the evaluated dwelling value cover you enough in a case of a claim? If you are comfortable, then you can take your chances. Ask your insurance company if they can lower your insurance cost by getting replacement cost versus guaranteed replacement cost.
Usually, the conditions to get replacement costs are that you insure to a certain percentage of the evaluated dwelling value of your home. Different insurers offer different plans. These plans usually range in the requirement to insure 80% or 85% of the reconstruction value.
Insurance varies by state jurisdiction. Be sure and ask about these policy values from your insurer.
Knowing this in advance could help you avoid the entire argument about whether or not the value is correct. This allows you to have a safe middle ground if you are comfortable with taking on the risk.
What Else Changes If You Increase or Reduce Your Insured Value?
Many of the coverages on the homeowner insurance policy are set as a percentage of the insured dwelling value. For example, your personal belongings and contents may be covered at 50% of the building value. Your additional living expenses may be set at 10% or 20% of the total insured value.
Any time your insured dwelling value changes, make sure you review how it will impact the rest of the coverages on your policy. This is especially true when it comes to the contents of your home and your personal belongings.
Sometimes the value of the items in your home may be worth much more than the averages set in online calculators. In these cases, you want to be careful when you reduce your dwelling value. It could also reduce the related insurance amounts for:
- Additional living expenses
- Personal property
- Detached and additional structures
- Storm and sewer damage
Reducing your home insurance dwelling value does not impact the liability coverage on your home policy, riders or special endorsements, or the special limits within the policy.
Are There Other Way to Save on Insurance Costs?
You may go through all the steps to find out why your dwelling insured value is as high as it is. You may try to negotiate with your agent.
And in the end, you might still want to find ways to save money on your plan. There are a few ways to do this.
- Deductible: Increasing the deductible on your policy could save you up to 40% on your costs.
- Bundling: Ask for a quote for your home and car insurance with the same company to get cost savings from bundling.
- Get a new policy: If you are canceling a policy mid-term or before your insurance renewal to save money or get more coverage, it pays to cancel your policy early.