How much insurance do I need to cover the value of my home?

Posted On Monday February 24, 2020

Insurance to Value Explained.

Buying a home is one of the biggest investments we will make. For many of us, in order to buy that home we typically need to go to a bank and ask for a loan (mortgage). As part of the condition of getting a mortgage, the lender requires us to carry insurance.

So how much insurance is enough?

Property insurance helps protect your largest most important asset.  The biggest misunderstanding consumers have when evaluating how much insurance to buy is using the market value of their home to determine its value.

Market Value – the value that comparable homes are selling for

Reconstruction Cost – the cost to hire a contractor to replace the home as it is, using materials and design of similar quality

Reconstruction costs can be much higher than market value.

Underinsurance affects both newer and older homes. Many factors determine the cost of reconstruction. Such as:

Neighbourhoods. Different neighbourhoods share different characteristics that may affect the replacement cost of a home.

  • Where is your home located? Suburban? City? Rural? Waterfront?
    • Each locale comes with its own set of requirements that will affect overall costs.

Building Type. A single family home has different construction than a duplex or triplex.

Construction Type & Quality. Reconstruction costs depend on materials used.

  • Does your home have any custom features? Built-in cabinetry? Custom windows?
  • Is your home solid brick? Vinyl siding?

Living Area. The primary area of your home that has full storeys. The other areas of your home, such as half storeys, attached garage, basement (finished or unfinished) are described separately, but should be included to ensure an appropriate replacement cost is determined.

Age of Home. Materials in new homes purchased through local retailers will have different costs than materials in older homes that tend to require special orders for items such as doors, windows, ornate moldings.

  • Older homes must meet current building codes resulting in increased cost.

Site Accessibility and Economy of Scale. When developing a new subdivision, builders generally receive discounts on material and labour when building multiple homes at the same time. Large machinery can easily access the empty lots.

Reconstructing an existing home is more costly with materials and labour not receiving the same discounts, increased time involved to schedule sub-contractors, and possible building restrictions - a few of the factors that mean individual builds are generally higher.

Demolition and Debris Removal. The cost associated with cleanup before building can begin, can be extensive.

Inflation. Costs associated with materials and labour tend to increase each year.

  • Each year when your policy renews, many policies automatically increase the insurance limit on your home to reflect changes in reconstruction costs. This helps to ensure you are properly protected in the event of a loss.

Replacement Cost. The cost to repair or replace with new property of similar kind and quality, without deduction for depreciation.

  • Many policies have a provision that requires policyholders to carry insurance to at least 80% of the damaged building’s value at the date of damage. If this provision is not met, penalties may be imposed.

What steps can you take to ensure the reconstruction value of your home is current?

  • Speak to your agent or broker. All insurance companies use industry tools to help you determine an appropriate insurance value for your home.
  • A full review with your agent, at each renewal is the best way to ensure that you have the right coverage for your home.
  • It is also important to contact your agent any time you have done extensive repairs, renovations or additions.

Our Agents are always available to review your policy with you and answer any questions you may have.