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Understanding Your Home's Insured Value

Let’s say you paid $100,000 for your home two decades ago. However, your insurance policy uses a much higher amount as an insured value. How did this happen? Many people think of what they paid for their home as their maximum potential loss in a home insurance claim. There’s a bit more going on the numbers, though, and it’s to the insured’s benefit.
Rebuild cost
If you paid $100,000 for your home 20 years ago, chances are good that your home has appreciated quite a bit in value. Your potential financial loss has a closer relationship to what your home is worth today than with what you paid for it years ago. However, that relationship is almost accidental. Instead, if you consider how much it costs to build another home just like yours, the insured value makes more sense.
Labor costs and transportation costs play a role, both of which increase over time. Unique features of your home also weigh on the cost of rebuilding. Modern home insurance policies consider everything, from the number of floors and square footage to whether you’ve upgraded the kitchen and bathrooms. This method captures the value of your improvements as well as the money you invested when you bought your home.
Today, sophisticated software calculates the value based on the current cost of materials and labor to rebuild your home as good as new if you have a total loss. If you have a partial loss, you have plenty of room as a buffer. As the cost of materials and labor changes, your insured value should be adjusted as well. Some policies offer automatic inflation-based adjustments as a built-in feature. Other policies may not — or the math may be less precise than you’d like.
For these reasons and others, it’s always a good idea to review your coverage with your agent or broker once every year to 10 months. Chances are good that there are some policy adjustments available that can improve your coverage. Life changes and insurance coverage needs to change sometimes as well.
Also, if you make any major improvements to your home, be sure to reach out to your agent or broker to be sure your policy covers the value of your new investment. Painting the bedroom — like you’ve been promising to do — won’t change the insured value of your home, but upgrading the bathrooms in the house could change the rebuild cost of your home.