Most homeowners keep track of changes in the estimated value of their homes. If the estimate increases, does it mean you should increase the limits of your home insurance coverage to accommodate the hike? The quick answer — maybe, maybe not. Why the hedge? It depends on why the value of your home has increased.
The good news? If what increased is the possible sale value, you’re likely in good shape, insurance-wise. The amount of home insurance coverage you need doesn’t change based on real estate prices.
How real estate prices work
Real estate prices focus on demand. The more demand there is for a house, the more a seller can ask to be paid. Demand depends on a number of factors and can change over time.
An example: Location is one of the most important factors in real estate. If a home is in a trendy neighborhood, a great school district or near desirable shopping or entertainment venues, its market value could be greater than that of a house in another location. On the other hand, neighborhoods can fall off “popular” lists, school districts can be redrawn, and stores and theaters can close. That same house likely wouldn’t sell for nearly as much.
Most recently, home values have increased in many parts of the country as the real estate market heated back up after the recession. As more buyers enter the market, sellers can demand higher prices.
How home insurance prices work
When you buy home insurance, you don’t base your coverage limits on what you paid for the house. Instead, you buy enough dwelling coverage so that you can rebuild what’s likely your largest investment in case it is destroyed by a covered event such as fire or wind.
Factors taken into account in arriving at this amount — also called the replacement value of your house — include the size of the house and local construction costs.
Insurance providers then consider the amount of risk presented by a particular home and policyholder. Again, location is important: It determines the types of threats a home can face. For example, it costs much more to insure a home in Tornado Alley than it would for a similar house in a region with less-volatile weather.