Is your Homeowners Insurance Sufficient?

In the wake of the sub-prime mortgage crisis, Wall Street's meltdown, and the general tanking of the economy, many people have lost their homes. But the good news is that many more people have not. Regardless of the pessimistic outlook for the future, home ownership is still one of the bases of the American dream. There are still millions and millions of homeowners that have managed to hang onto their properties. Although they may not be worried about losing their homes to foreclosure, they must still contend with the possible loss of their investment due to other occurrences. Because of these very real concerns, homeowners insurance is an absolute necessity.

But, just like everything else, your insurance needs can change over time as well. Let's say, for instance, that you bought a 1,500-square-foot home twenty years ago. (We'll use rounded numbers and include the cost of land in them, just to make our example easy and straightforward.) Let's also assume that the cost to construct the property at that time was $50 per square foot, making the total cost of the home $75,000, and you insured it for that amount. As a new homeowner, you were on top of the world and life was grand!

However, you didn't stop there. Like many ambitious homeowners, you had the desire to improve your property and you set out to do so. So, you installed a fireplace, added a deck, upgraded the flooring and replaced the roof. You may have even decided to enclose the deck as a sunroom. The sweat equity that you put into your home only added to its value, which continued to rise by way of inflation and natural housing market increases.

Now, let's fast-forward to today. Your 1,850-square-foot home (remember that neat to sunroom) might cost $100 per square foot to build at today's prices, giving it a current replacement price tag of $185,000. Not too shabby, as investments go. But while you were upgrading your home and enjoying the good life, did you neglect to adjust your insurance coverage to keep up with the increasing value of your property? If you didn't, your investment is in peril. If your home were suddenly destroyed by fire, the original insurance amount would not even cover half the cost to replace your home. You would therefore be personally responsible (by way of your own finances or a new mortgage) to pay the remaining amount necessary to rebuild your home to its pre-fire condition.

Most of us probably don't have $110,000 just lying around for rainy day. If you haven't done so recently, talk to your homeowner's insurance agent. He or she can give you an analysis of your property's current value and whether or not your insurance offers sufficient coverage for it. You can also supplement your policy for to cover personal belongings, any detached buildings on the premises to (such as a garage or shed), and living expenses should your home will be damaged or destroyed. It's safe to assume that if the disparity between your policy's coverage amount and your home's current value is substantial, your premiums will rise to bring things back in line. But the peace of mind that you'll receive will be more than worth the added cost.

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