23 Jul 2020 What if a Giant Asteroid Landed on My House?
I had a great conversation with my property and casualty insurance agent last week. He called to see if anything had changed in my life that might warrant an adjustment to my home and auto insurance coverage. I didn’t recognize his number at first but for some reason, knowing it could be a robocall, I picked up. I’ll be honest, it was the middle of a workday and the last thing I felt like talking about was insurance policy limits and deductibles, but as it turns out, I’m really glad he called. You’re probably not on the edge of your seat waiting to hear the details of our call but maybe you should be.
One of the things we talked about was the amount of homeowner’s coverage we had on our home should the worst happen. In our case, we were paying about $70 a month to buy a homeowner’s insurance policy that had a coverage limit on our house (“dwelling” in property insurance parlance) of $249,500. Sounds paltry when compared to the amount we would ask for if we were to put our house up for sale today but seems pretty good relative to the tax value of our home. So what gives? Did we have too much coverage or too little? Turns out, probably too little.
My family and I live close to downtown Raleigh in a modest, 1600 sq/ft ranch house built in 1958. According to the most recent Wake County tax assessment, the value of our lot is worth 4 times more than the $111,000 value of our actual house. That’s crazy to think about but it’s one of the reasons that homeowner’s insurance can seem relatively cheap when compared to the overall value (house and lot) of your home. When you purchase homeowner’s insurance you’re insuring your house, not the land.
We buy homeowner’s insurance for many reasons but none of them has much to do with our home’s resale or tax value. Rather, we buy homeowners insurance to protect our other assets should someone get injured on our property and sue us. We buy it for the loss of use coverage that would help pay for rent should we need to move out of our house during a major repair. Speaking of major repairs, we buy insurance to help cover the potential costs associated with a giant Raleigh oak tree falling on our roof during a thunderstorm. But perhaps the most important reason is that it enables us to rebuild our home should it be destroyed by a huge earthbound asteroid! (My favorite over-the-top example of catastrophic loss – of course it assumes no one was home!)
My family and I love our neighborhood and our street. We can (during normal times) walk our kids to school; it’s two miles from our church and a mile from my office. If our home was destroyed, we’d want the option to rebuild our home on the same lot without having to take out another mortgage or substantially tap into our savings. I checked with a local builder friend and he said that it could easily cost $250 sq/ft to build a home in Raleigh these days. If I’ve done my math right, in the event of a loss, our homeowner’s policy would have provided us enough cash to build a 1,000 sq/ft house. Yes, it would be a new house but it would be 600 sq/ft less than our current setup and with two kids we already feel tight enough as it is.
Most people would have a goal similar to ours if they lost their house. That’s why most homeowner’s policies attempt to cover what is called the replacement cost of a house. There are other options like actual cash value but they are less common. Replacement cost policies are designed to pay the policyholder enough cash to rebuild their home should something happen to it. Pretty straightforward except for the fact that there are multiple inputs involved in defining replacement cost which can mean that the dollar amount of coverage can vary by insurance company and may be different from what you expect or even need in the event of a loss.
After the conversation with my agent we increased my dwelling coverage to $375,000. I was surprised by how little it changed our annual premium for the confidence I gained that my family has the right amount of coverage should we need it.
I encourage you to check in with your property and casualty insurance agent to ask them about your specific coverage amounts and deductibles. This is especially true if you’ve recently remodeled or completed an addition. I will say that I felt like I had to push a little to get my coverage increased to $375,000 – even though rebuilding a 1,600 sq/ft house on an empty lot could easily cost $400,000 – so don’t be afraid to ask questions. It’s important to note that you may have a different coverage need. Perhaps you can build in your area for less than it costs in Raleigh or maybe you’d be fine selling your lot and moving to a new location if you lost your house.
In addition to ensuring that you have enough coverage on your home to replace it in a worst-case scenario, you might also ask about…
…any discounts that might be available (multi-line discount, alarm system discount, credit score, martial status).
…the liability limits on your home and auto insurance. They should be tailored to fit your specific situation. For example, if you’re a business owner, operate a business out of your home, have a high net worth or drive often for work you might need additional coverage.
…purchasing an umbrella policy for additional liability protection – we’ve had an umbrella policy for years now.
…whether you need specific coverage for specialty items such as business equipment, jewelry, artwork, silverware, and firearms.
…how the deductible works on your home and auto insurance. If you have the ability to increase your deductible, it could save you premium dollars. Plus insurance companies are likely to cancel a policy for multiple back-to-back small value home claims.
As always, please let us know if have any questions or if you’d like our advice on reviewing your insurance coverage.