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homeowners insurance coverage

With Skyrocketing Home Values, Insurance Policies are Left Behind

Many homeowners’ insurance policies may be “woefully insufficient” due to a recent spike in Utah home values.

While home sellers may be having a heyday in the current real estate market, people staying put may be taking on more risk than they realize from leaving their homeowners insurance policy at the same level it was when they first bought their home.

In the last five years, according to Zillow, the average value of a single-family home in Utah has gone from $286,000 (November 2015) to a whopping $487,000 (May 2021). We’ve had discussions with many of our clients about whether it makes the most sense for them to sell their homes, and how these skyrocketing prices can cause their home to be underinsured.

While many homeowners’ insurance carriers will adjust the value of a policy incrementally each year to account for inflation, Rusti Ferris, an insurance broker at Choice Plus Insurance, says that this automatic adjustment won’t be nearly enough for Utah’s market today.

“The inflation adjustment is pretty standard at 4 percent per year, so where we’ve seen around 20 percent growth in just the last year, it’s not going to come close to matching the increase in cost to rebuild the home.”

Many homeowners mistakenly assume that the cost to rebuild the home will be the same as the market value of the home. While it is often in the same ballpark, it can actually be much more or less expensive to rebuild the home than it would sell for on the open market.

There are a number of reasons for this, but one of the most common is that the market value reflects the age of the home, while the cost to rebuild is an estimation of what it would cost to replace a home with the same square footage and number of beds and baths but using modern standards, modern building codes, and at today’s prices for materials like lumber and concrete.

In just about any market, a brand-new version of something is going to be more expensive than one that is decades old. Housing is no different.

Just how drastic can the difference be? After their home burned down four years ago, our clients Glen and Genette Biddulph found out.

The Biddulphs had spent five years doing massive remodels and renovations. To their credit, each time they completed a new project, they reached out to their insurance agent to see if they needed to update their homeowners policy to cover the additions. They also reached out when they purchased something expensive like jewelry or art, and each time, the agent said no, and that their current policy would be enough.

“We had the same agent for 34 years, and we trusted him. We thought, ‘Well, he’s the expert so if he says we’re good, then I guess we’re good’.”

Unfortunately, after five years of massive improvements to the property, along with the natural upswing of the market, the actual cost to rebuild the home was much, much more than the policy covered.

It was then that a wildfire came down the mountain and burned their home. The Biddulphs spent three years, countless hours, blood, sweat, and tears fighting alongside their attorney against the insurance company, but in the end were still only able to recoup about 40 percent of the cost to rebuild their home.

“Fighting the insurance company was a nightmare. We had been paying our premiums and did everything we were supposed to do, but we put our trust in the wrong agent, and even after years of fighting, we only ended up with about 40 percent of the cost to replace the home and our belongings. But our neighbors who didn’t fight with the insurance company only got about a fourth of their cost to replace.”

As financial planners, we do not sell insurance policies, but we have seen firsthand how being underinsured can derail so much of what a client has been working toward. Since hearing the Biddulphs’ story, we’ve begun emphasizing insurance in our financial plans even more than we did before, and helping our clients understand the need to get the agent to come look at any improvements they make to their homes.

What many of our clients don’t know is that they can get a policy with a “replacement cost” endorsement, that adds a certain amount (usually 25, 50, or even 100 percent) on top of the base policy in case the cost to replace the home exceeds the insured amount. This rider can be a good layer of protection in case you forget to update your homeowners policy, but it won’t replace evaluating your policy every so often and increasing the coverage when needed.

It also won’t replace working with the right professionals, be they insurance agents, financial planners, or attorneys; the Biddulphs’ policy included a replacement cost endorsement.

If you would like to have one of our professionals review your insurance policies and point out any gaps in your coverage, we are more than happy to help.

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