Rebuild cost vs purchase price: a plain look at home insurance

When people think about insuring a house, they often start with the price they paid for it. That is a natural place to begin, and it is also a common source of confusion. The purchase price and the cost to rebuild are two separate ideas, and mixing them up can leave a homeowner with less protection than they believe they have.

This article is general education about how to think about the question. It is not a quote and does not describe any specific policy. For details about your own home, a conversation with an agent who can see the facts is always the right step.

Two numbers that are easy to confuse

The purchase price is what a buyer and seller agreed to on a given day. It reflects the lot, the neighborhood, the schools, the local market and how many people wanted a home there at the time. Part of what you paid went to the land, and land does not burn down.

The rebuild cost is a different question: what would it take to put the house itself back, with similar materials and similar workmanship, if it were badly damaged? That depends on labor, materials, the size and style of the house and the details inside it. It can move up or down independently of the housing market.

A home can be worth a lot on the market and still be inexpensive to rebuild, or the other way around. That is why basing your coverage on the purchase price alone is a bit like measuring a room with the wrong tape.

Why the gap matters

If a policy is set too low for the actual cost of rebuilding, a serious loss can leave a gap between what the insurance pays and what the work costs. That gap comes out of the homeowner's pocket, at a stressful time. A policy set sensibly closer to the real rebuild figure helps avoid that.

It is also worth remembering that homes change. A remodeled kitchen, a finished garage, new flooring or an added room all increase what it would take to restore the house. Insurance that was right when you bought the place may no longer match what you live in today.

Details worth reviewing

• Square footage and number of stories, as the policy records them.
• The year of construction and any major updates to wiring, plumbing or the roof.
• The type of roofing, flooring and finishes you actually have.
• Any improvements since the policy started, such as an addition or a remodel.
• Whether your personal belongings are covered, and how.
• What the deductible is and whether you could comfortably pay it tomorrow.

Go through the list with your policy documents in hand. If any item is wrong or out of date, that is a good reason to call. Corrections are usually simple, and it is far better to fix them now than to discover them after a loss.

Questions to ask your agent

You do not need to be an expert to have a useful conversation. These questions open it up.

• How is the coverage amount on my home figured?
• Is it based on the cost to rebuild, and how recently was that checked?
• What does my policy not cover, in plain words?
• If my home were damaged and I could not live in it, what would be covered during the repairs?
• What changes to my house should I report to you?
• Are there ways to adjust my deductible, and what would that do to the budget?

Pay attention to whether the answers are clear. A good agent explains in everyday language, and a reply you cannot follow is a signal to keep asking.

Review it on a schedule

Pick a regular moment to look at your coverage, such as once a year when you are already thinking about the household budget. Tie it to a habit you have, like going over your bills in January or when the seasons change. If you finish a remodel or buy something big for the house, review it again right then.

Home insurance is one of those things you hope you never use, which makes it easy to forget. A short review once a year is cheap insurance on the insurance itself.

You do not need to memorize insurance vocabulary. You need to know three things: what you are protecting, how much it would take to put it back, and whether your policy is in line with that. If you can answer those, you are ahead of many homeowners.

Massey Life & Health Insurance Services lists home insurance among the lines it offers, alongside life, auto, business, health and Medicare. That makes it possible to review the whole household in one sitting rather than juggling several offices.

Ask for a conversation

If you would like to talk it through, Massey Life & Health Insurance Services offers a free one-hour consultation. Call (661) 304-1080, and bring your questions. The office is at 2627 South Waterman Ave., Ste. B, in San Bernardino.