Higher Home Values - Ramifications for Your Insurance Coverage

First, I need to disclose that I do not sell insurance, nor am I licensed to sell insurance, nor do I get any commission or payback if I recommend someone should increase their insurance. I am a fiduciary; required by law to act in the best interests of our clients. That said, let’s talk about homeowner's insurance.

Your house was worth $400,000 at the beginning of 2021, yet now it may be worth $500,000. Do you need to increase your homeowners insurance? You might. Your homeowner's insurance likely has a replacement value and a coinsurance formula for claims. It works like this: If your replacement coverage is $350,000 but the actual cost to rebuild is $425,000, then you would be $75,000 short if your house burned down. You should consider increasing your coverage.

What about the coinsurance formula for claims? Most homeowner policies require you to have coverage for at least 80% of your home’s replacement value in order to get the full claim amount. Example: A tree falls on your house, causing $120,000 worth of damage, however, your home is worth $500,000, but you only have $350,000 worth of coverage. This means that after the deductible, your insurance will only pay $105,000 on your $120,000 claim, because your house was only insured for 70% of its value. If you haven’t reviewed your coverage in the past couple of years, you should probably talk to your insurance agent about your homeowner’s coverage to make sure you are still fully protected. One thing to note is that many insurance companies will automatically increase your homes replacement cost when they renew your policy, so if you have renewed recently you are probably fine.

If you have to pay private mortgage insurance, higher home values may end that requirement.

A positive side of increasing home values related to insurance is that you may not need private mortgage insurance any longer.  When your equity is greater than 20% of your home's value, you are no longer required to pay for private mortgage insurance.  Example: Your home was worth $400,000 and your mortgage is $350,000. Your mortgage lender will most likely require you to purchase private mortgage insurance because your equity is less than 20% of your home’s value [$50,000 out of $400,000 is only 12.5%]. Now if your home's value has recently increased to $500,000 and your mortgage is still $350,000, then you do not have to pay for private mortgage insurance. Your equity [$150,000 out of $500,000] would be greater than 20% [30%] of the ratio to your mortgage in your home’s value. Bottom line: If you were required to pay for private mortgage insurance, call your lender to see if you still need it as your home’s value may have dramatically risen in the past 12 months. 

Note: As a financial advisor, I receive no direct benefit if one of my clients increase their homeowner's insurance. In fact, if clients are spending more on insurance there is less for me to invest. However, I am looking to protect and grow our clients' wealth - not just investments - so am happy to assist in making sure clients have the appropriate insurance coverage.