Update Homeowners Insurance After Remodeling
Use Construction Software or Building Contractor Bids for Estimates
Mar 14, 2009
Reassessing the home's value and updating the homeowners insurance policy should be done on a yearly basis, but it is overlooked by most people. Most insurance companies are more than happy to help when asked.
For example, State Farm Insurance uses a software package called Xactware to create an estimate that's based on various bits of information such as the age, style, square footage, and unique features of the home such as enhanced home security systems. Construction and architectural software can also be helpful.
What Homeowners Insurance Is and is Not
The monetary value stipulated by the homeowners insurance policy is not the market value of the home, although they are closely related. Residential market value is what a buyer in today's market could be expected to pay for the property, which includes the land and the physical structures.
It also is not the outstanding balance on the home mortgage loan. So what is it? In a nutshell, it's the replacement cost, or what it would cost to rebuild it to its current state, with improvements and amenities, including the current cost of labor trades, such as carpenters, plumbers, electricians, etc.
An important distinction here is that the reconstruction cost does not include the price of the land itself although market value does.
Improvements that Affect the Amount of Insurance Coverage
All home improvements tend to raise the equity in the home, the market value, and the replacement price tag. The caveat is that not all improvements are valued equally, regardless of what they cost. That's just the nature of the beast.
Even though market value (excluding land) is not the same as replacement cost, the two are closely related because the market prices construction materials according to demand, and demand is related to what a prospective buyer is willing to pay.
This is important to take into consideration when deciding on which remodeling project to embark on. According to the Cost vs. Return report from Remodeling magazine:
- The ROI for a minor kitchen remodel is 85%!
- Replacing current siding with a fiber cement siding such as Hardieplank brings the highest residential resale value.
- In a bathroom remodel or add on, the greatest ROI is realized by installing middle-priced fixtures such as a bathtub, low-flow toilet, and sink, not the higher priced ones.
- Replacing windows with wood frame models gives the best bang for the buck (or punch for the Pound), not vinyl, as might be expected.
- Adding a central air conditioner and heater brings more equity than a swimming pool.
- A basement remodel is of more value than adding a sunroom.
- Adding a swimming pool has less effect on ROI than a deck addition.
How to Determine the Cost of Home Replacement
This is not a complex chore although it can be detailed. As mentioned at the beginning of this article, any insurance company will be glad to assist with the estimate; it's in their best interest.
If a remodeling project has just been completed or if the homeowner is in the process of selecting a building contractor and has submitted bids for a renovation, this will furnish a good ballpark figure for that part of the total estimate. Also, canvas local realtors or construction companies and inquire about current labor costs.
However the estimate is arrived at, be sure that it is 100% replacement cost at a minimum. Disasters almost always happen unexpectedly.
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