Home insured value??

[bruceinga]

With the rising rates on insurance I thought I'd check the rates of another company.
Once I got the rates I took a second look at what I have now. We recently bought a rental for $86,900. With improvements we probably have $120,00 in it. I see that my insurer has it insured for $247,000! I asked the rep in my agent's office why so much and all that she could say was that they are made to insure it for the replacement cost and that I must be made whole in case of a loss. I replied that I had only $120,000 in it and that $120,000 would make me whole. She said that if it burned that all that I would have would be a lot. I replied, yes, probably worth $30,000.
She didn't know what to say to that.

She did some checking and found that they had made a miscalculation on the square footage and that the replacement value should be $157,000. I still argued that if I wanted to insure it for $120,000 I should be able. By the way, the mortgage is $68,000.

She said she would talk to the agent about it.

Am I right or do I need to insure it for replacement costs?

Thanks in advance.
Bruce

[Whitenack]

You want it insured at Replacemnt Cost. Replacement Cost is how much it would cost to build back if it were a total loss. You may only have $120k in it but if you were to have to build it from scratch you wouldn't be able to build it back for that. $157k is the insurance company's best guess at how much that would cost.

[bruceinga]

I understand the logic but shouldn't I be able to insure it for any amount as long as the mortgage company is happy!

[Whitenack]

Theoretically, yes. But most folks aren't like you. Most folks want everything back the way it was before the fire/tornado/etc. Therefore, you won't find many companies that will write it on an ACV (Actual Cash Value) basis, and if you do, you'll probably pay as much in premiums as you would a RC policy. And, when it comes to claim time, you aren't going to be happy with a cost to replace at $150k and a check from the company for only $120k. People may say that when it comes to paying the premiums but when it comes to claim time they quickly forget.

It becomes a stickier issue when you have a partial claim, which is much more likely. Let's say you have a grease fire in the kitchen that will cost $20k to replace. You'd want $20k from the company, wouldn't you? Well, since you chose ACV instead of RC, you'll only get what the value of the kitchen was at the time of the claim. So everything that is outdated and obsolete will not be valued as new. An easy example is the roof. Your roof may cost $7k to replace. But 10 years from now it will only be worth half that because it is 10 years old and not as valuable as a new roof. In the event of a claim, you will only receive the value of the roof at the time of the claim, not the value of a new roof.

[bruceinga]

Ok, I understand now.
Thanks