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I wanted to share the article byTim Ganoung at the WEA benefits site. He explains about the downside of underinsuring your home. Don’t be confused about what it would cost to rebuild your home, as compared to what is its taxable value or what it would sell for on the open market.

  1. If your home was destroyed by fire, would you have enough insurance coverage to replace it? Not having adequate coverage to rebuild is one of the most common mistakes homeowners make—and potentially the most costly. Whether it is due to a lack of awareness or an intentional strategy to save money on premium, the potential financial risk is significant.

During a recent insurance evaluation, I saw that the person’s primary home policy (with another provider) was written with a coverage limit of $108,000. Our reconstruction cost calculation for the home was $222,000, so they were currently insured at only 49% of the value. The homeowner would be on the hook for 51% of the cost, or $114,000, to rebuild the home.

In this case, this situation would invoke the co-insurance clause in the contract—even on a smaller claim. For example, let’s assume they have a $500 deductible and needed to replace their roof due to hail damage. If the cost for a new roof was $10,000, the insured would only receive $4,900 for this claim because of the co-insurance penalty resulting from underinsuring the structure.

Insurance is meant to protect against the catastrophic financial loss—losses that would be damaging to your family finances. Don’t sacrifice coverage on your biggest investment to save a few bucks on your premium. A better way to save is to consider increasing your deductible and making sure you have the right coverages.

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