I just returned from southern California where my parents live. The house they live in was bought new in the 1970's for about $35,000. It is now worth at least $980,000. That is a pretty good return on money. It raises an important question though. Have my parents increased the amount of their house insurance enough to replace the structure?
If you live in an area with dramatic increases in housing prices you should check to make sure you are carrying sufficient insurance to survive a disaster to your home. Otherwise you might end up unable to replicate the asset you currently own.
Many homeowner's insurance policies have built-in "inflation-adjustment" coverage, which escalate the capital assets total annually (along with an automatic, corresponding increase in your insurance premium), but the underlying inflation-adjustment factor of such policies is often inadequate, and does not fully cover all value or total risk desired. Still, a home which has appreciated from $35k to $980k in the last 30-35 years, has likely seen some significant increase in premium cost over that period, regardless of any inflation adjustment for its insurance coverage, which would be a pretty good hint that something is up, and requires close attention to examine the cause for regular premium increases.
And while you're at it, make sure its an HO-3 "All Perils" homeowner's policy. In an H0-1 or HO-2 "Current Risks" policy, the holder has the burden of proof, to the insurance company, as to why his claim for loss should be honored. In an HO-3 policy, it is the obligation of the insurance company to prove to the policy holder why his claim should not be covered.
Also, "Full Replacement Cost" coverage will provide sufficient funds to rebuild, in the case of a total loss (such as a fire), even if that cost is now significantly above the original purchase price. "Current Value, Less Depreciation" is a much cheaper premium, but it will not provide adequate coverage to underwrite the cost of fully replacing your loss, especially in a catastrophe.
You are generally far better off carrying "Full Replacement Cost" coverage with a high deductible (say $10,000-$20,000), to cover you against a catastrophic (or total) loss and rebuilding, than you are carring "Current Value, Less Depreciation" coverage with a small deductible (say $1,000-$5,000).
Insurance coverage becomes more critical, and valuable to the policy holder, the greater and broader its coverage of a major potential loss.
Posted by: Bob Hansell | August 28, 2006 10:35 PM | Permalink to Comment