Home Insurance, what level should I get?

[jimmyrules712]

I'm buying my first home, it's 3200 square foot purchase price $189k in a small town in the midwest.

I'm looking at home insurance options and I can either do a policy that covers the house for a cash value of $200k for $1100 a year or a policy that covers replacement value that every company I've talked to has estimated at somewhere between $350k and $400k for $1500 a year. Supposedly they estimate it so high because of how much square footage the house has. My instinct tells me to go for cash value, considering I could re-buy a similar house in town for $200k. Is there any good reason to go for the replacement value policy?

[Joan.of.the.Arch]

If you lose your house, getting the cash value would allow you to buy a new house. However, you would still be responsible to tear down the old house and restore the property to a non-dangerous state. You might pay for that out of your insurance settlement, thus reducing the dollars you have available to purchase a new home, so you'd be down-sizing, most likely. You could probably eventually sell your lot and recover some money.

But do you live in a Home Owner's Association development? If so, do they dictate that you must have replacement value insurance? Would you still owe fees to the HOA even when you have no house left, but only an empty lot? Would your fees + taxes + insurance on the lot (You'd still need to insure it, at least for liability.) add up to such a yearly loss that you should have just chosen the replacement value insurance in the first place? Would your HOA define &restrict the re-building on that lot to such a degree that there'd be little hope of ever selling the lot? If so, you might be better off with that replacement value insurance.

Will you be putting further money into your new house by doing any remodeling, updating, landscaping, etc? If so, would "cash value" recognize that fresh money & value put in to your house?

[jimmyrules712]

If you lose your house, getting the cash value would allow you to buy a new house. However, you would still be responsible to tear down the old house and restore the property to a non-dangerous state. You might pay for that out of your insurance settlement, thus reducing the dollars you have available to purchase a new home, so you'd be down-sizing, most likely. You could probably eventually sell your lot and recover some money.

But do you live in a Home Owner's Association development? If so, do they dictate that you must have replacement value insurance? Would you still owe fees to the HOA even when you have no house left, but only an empty lot? Would your fees + taxes + insurance on the lot (You'd still need to insure it, at least for liability.) add up to such a yearly loss that you should have just chosen the replacement value insurance in the first place? Would your HOA define &restrict the re-building on that lot to such a degree that there'd be little hope of ever selling the lot? If so, you might be better off with that replacement value insurance.

Will you be putting further money into your new house by doing any remodeling, updating, landscaping, etc? If so, would "cash value" recognize that fresh money & value put in to your house?

There's no HOA in my neighborhood. And I won't be doing any substantial remodeling, it's actually an older home, originally worth a lot less, that has already been remodeled (and the $200k price reflects that. 10 years ago the house was only worth $100k).

[Robert742]

I would go with a replacement cost policy. If you have a large loss, you can't use the insurance proceeds to buy another house until the mortgage on the damaged house is paid in full.

If you have a fire that would cost 250k to repair your house to its pre-loss condition, you have a 200k policy and 150k balance on the mortgage, you will get 50k, but you will need a lot more than that even if you want to walk away from the property.

Even if you have no mortgage, the cost to repair the property so you can sell it will greatly reduce the proceeds.

Plus, if you have an actual cash value policy, both the damaged part of the house and your damaged household goods will be paid the depreciated value. For example, if your refrigerator is a 10 year old frig, you will be paid the value of a ten year old frig, not the value to buy a new one. Unless the house and all your personal property are brand new, depreciation adds up fast.

Referring to the first example, 250k replacement cost to restore the property could end up being a 180k actual cash value settlement, even though you have a 200k policy.

Go with replacement cost and take the highest deductible you can afford to get a lower premium.

[greenskeeper]

for reference my house is valued at 270k and my homeowners is around $450/yr in PA.

[jimmyrules712]

for reference my house is valued at 270k and my homeowners is around $450/yr in PA.

How big is your house? I believe part of the reason for the high insurance cost on mine is that it's a 3,400 sq ft house (built in 1960). State farm is the cheapest quote I've gotten, they're quoting $1265 per year for 100% replacement cost (if I bundle my auto with them). That's with a 1/2% deductible, and minimal coverage on anything extra.

Allstate quoted me at $1800 a year and farmers quoted me at $3k!!! Progressive and liberty mutual were around the same as allstate.

I'm in Oklahoma, maybe they think I'll get hit by a tornado...

[maat55]

How big is your house? I believe part of the reason for the high insurance cost on mine is that it's a 3,400 sq ft house (built in 1960). State farm is the cheapest quote I've gotten, they're quoting $1265 per year for 100% replacement cost (if I bundle my auto with them). That's with a 1/2% deductible, and minimal coverage on anything extra.

Allstate quoted me at $1800 a year and farmers quoted me at $3k!!! Progressive and liberty mutual were around the same as allstate.

I'm in Oklahoma, maybe they think I'll get hit by a tornado...

I would take the replacement if it is not a budget buster. I live in Owasso, we only paid1050 for 1700sf., yet our replacement value is 180k

[Robert742]

The size of your house affects the replacement cost, which requires a greater dollar amount of coverage, which cost more.

Even so, there are other areas of the country where you can have just as much coverage, and pay less than the prices you quoted.

But if your home is located in an area which is at greater risk for catastrophic losses, such as windstorms, or if you are in a rural area with no hydrants, or over 5 miles from the nearest fire department, these may be the factors driving the cost of your insurance. It could be worse -- your house could be in Florida or California -- where your insurance would be even more expensive.

You are doing a good job by shopping, but I would check a few more companies. Check with an independent agent. Safeco has very good rates for property insurance in my area (Oregon), but this may not be true for you. Ask your neighbors what they pay and who they insure with -- tell them you are trying to find a good homeowners insurance company, and I am sure they will volunteer the information.

If you are military, or an honorably discharged veteran, USAA is a very good company. Metlife auto & home and American National also offer insurance in Oklahoma.

This link is for the OK Department of Insurance, which has information to help you shop for homeowners insurance:

Oklahoma Insurance Department - Home