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| Vol. XIV, No. 6 July 2006 |
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Home Replacement Value
A HOME’S VALUE
In addition, factor in your community's building codes, which require buildings to be constructed to minimum standards. Rebuilding your home to today's standards, especially if you must redesign your home to meet the new standards, will probably cost more than it would to reconstruct it based on the old standards. A recent report by Marshall & Swift/Boeckh, a Los Angeles firm that tracks building costs, estimates that, in 2004, 61 percent of U.S. homes were undervalued for insurance purposes by an average of 25 percent. Higher Building and Labor Costs The increase in construction costs is tied to a variety of factors. Higher crude oil prices have made the delivery of goods more expensive. And because oil is used to make plastic pipes and vinyl siding, it has also driven up the costs of those products. Steel and cement costs have risen due to shortages created by strong demand from overseas markets, especially China. In December 2005, steel prices were up 4.2 percent from the previous year, and plastics were up 20.6 percent, according to Jim Haughey, the director of economics at Reed Business Information. Cement was up 12.3 percent and gypsum wall board was up 15.3 percent from the previous year. Price increases are widespread: supply disruptions related to Hurricanes Rita and Katrina raised prices for PVC pipe, which is used by plumbers for water lines and by electricians for wire conduits (PVC is a byproduct of natural gas). HOMEOWNERS INSURANCE No insurance company will permit you to set your limit for more than it would cost to replace your home. However, you may purchase insurance for less than the replacement amount because of the 80 percent rule, which provides that if you want to collect the full cost of replacing or repairing your house, the amount of insurance you carry at the time of the loss must be at least 80 percent of the full replacement cost of the structure. (Because the cost of homeowners insurance is relatively low, it is recommended that you insure your home to its full replacement value.) Full replacement cost means what it would cost you today to rebuild in the event of total destruction. This figure might even exceed the market value of your house if, for example, you have an ornate old Victorian with a lot of detail work that is virtually impossible to duplicate at today's costs. [Discuss this with your insurance representative if you do have an older, historical home; you may need a special type of insurance policy referred as an HO-8.] If you do meet the 80 percent test and your house is destroyed, you can recover the full replacement cost up to your policy limit. If you do not meet the test, your recovery will be less. To illustrate the 80 percent rule: the replacement value of your house is $200,000, which means you are required to have it insured for at least $160,000 if you want the insurance company to cover major damages in full. Suppose, though, that you decide to save money and buy only $120,000 worth of insurance; as a result, the insurance company will pay only part of your major loss. That part will be determined by setting up a ratio between what coverage you do have ($120,000) and what the insurance policy says you should have ($160,000). If you have a major loss, you will only receive three-fourths (75 percent) from the insurance company, minus the deductible. More words of caution: even if you do meet the 80 percent test, you'll only recover up to your policy limit in the event of total loss. So it's best to try to achieve 100 percent coverage of the replacement cost. In most policies, the 80 percent test does not apply to losses smaller than $1,000 or 5 percent of the amount of the insurance you carry. How can you avoid being underinsured?
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