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Travelers: As Home Values Fall, Lowering Policy Limits Can Leave Homeowners Vulnerable

Source: Travelers

Posted on 13 Apr 2009

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Travelers along with other insurance experts are cautioning homeowners against reducing their policy limits amid falling home value prices. The caution comes with a reminder from the insurer that the cost to rebuild a home is generally not the same as the sales price, or market value, and lowering policy limits could leave homeowners underinsured.

Home repair costs increased approximately 4 percent countrywide in 2008, despite the downward trend in the economy. That means, the cost to rebuild a home has gone up, even though that same home may now be worth less because of current market conditions.

"As property values continue to fluctuate, consumers might be tempted to lower their policy limits," said Elaine Baisden, vice president of national property for Travelers, a leading provider of homeowners insurance. "But it's important to remember that the market value of your home is not a reliable indicator of the amount of insurance you need. The best way to determine your individual needs is to consult your independent insurance agent or carrier to make sure you have the right level of insurance protection to return your home to its original condition should something happen."

Reconstruction costs - or the cost to rebuild a home - are generally more expensive than building new because reconstruction often involves the removal of damaged materials and the need to work around existing landscaping, power lines and other buildings. Reconstruction also factors in the current cost of building materials such as concrete, wood and steel. Some building experts say it costs up to 30 percent more to rebuild a house than to build it from scratch2.

By comparison, market value includes the cost of the land, which will still be there even if a home is destroyed. Market value is also influenced by other factors such as location and quality of schools.

"Home insurance limits are in place to financially protect your family should something go wrong," added Baisden. "If there's a fire or a significant weather event, you want to make sure you have enough coverage to rebuild your home in its entirety."