If you’ve been in a house for a long time, chances are you may be grossly underinsured for homeowners coverage.
If the unthinkable happens and you have a catastrophic loss, that’s not the time you want to discover that you’re underinsured!
Follow the 5-year rule
When you policy comes up for renewal each year, do you read the coverage limits? You should. And you should let your insurer know if there’s no way you could rebuild your house for the coverage limit.
Clark advises people to do this every five years, if needed. Write down the name of the agent or representative you speak to and the date/time of the call. That way if your insurer refuses to raise your limits and a catastrophic loss happens, you’ve already begun building a case against them.
A few years back, Clark’s insurer would not raise the limits on his primary residence. He had to trigger a clause in his contract and get a third party appraiser to look at his home. The appraiser agreed that his home had appreciated in value beyond his coverage. Only then did the insurer accept the appraisal and comply by raising his coverage — and Clark was happy to pay even though the extra coverage raised his premiums.
The scary reality is that insurance companies are not required to rebuild your home in the event of catastrophic damage if you’re grossly underinsured.
You need to insure your home for the replacement value, not the market value. If you suffer a catastrophic loss, the cost to rebuild would be far higher than what you could sell your home for right now.
Say you purchased your home 6 years ago for $100,000 when the market was on a real downswing. Now that the market has rebounded in most places, your home may be approaching $200,000. But your insurance has probably not kept pace. So you’ll be destroyed financially if you have a catastrophic loss.
It gets even worse if you have a mortgage on your property. You can lose your home in a disaster, be foreclosed upon and get sued by the lender for losses on the loan.
A couple of years ago, Clark bought a foreclosure in a mountain community. In that case, the insurer sent an appraiser out and told him he needed more insurance because of the expense of rebuilding on a mountain. Again, he was happy to comply.
The chances of a catastrophic loss are minimal, but why take the chance of having your wallet disrupted just as terribly as your life in the case of the unthinkable?