Nickels, as you may know Real Estate is factored into our net worth (Assets minus liabilities) and many studies have hypothesize that homeownership is one of the surest vehicles to establishing generational wealth. This is because according to my Real Estate class (that I completed but never did anything with) it is a commodity with limited quantity; we cannot make more land. Some of us have already actualized our dreams of homeownership and more recently some of us have already seen a return on our investment considering the value of Real Estate has risen exponentially in most areas over the past decade. So if homeownership is such an important tool towards establishing wealth, wouldn’t one say this is the type of investment we may want to protect? I would say, most of us answered this rhetorical question with a resounding ‘YES’! The best way to protect this precious cornerstone to wealth is to ensure our properties are insured properly.

When considering homeowners insurance one should look at the value of replacement cost which is the cost of rebuilding your home if there was a total loss. Some of the factors considered when insurance companies calculate the replacement cost of a home is location, materials needed to rebuild, labor costs, and the size of the home. These factors are not fixed and can be inflated over a certain period of time. Also, a homeowner should have the correct replacement cost coverage at the time of loss not at the time the policy is established which is why we homeowners should periodically review our insurance policies to ensure we have enough coverage to address replacement cost. Some financial professionals would argue this review should take place every 2-5 years.

Most insurance companies have established a coinsurance provision within their policies to ensure premiums received from the insured are enough to cover claims. Generally, coinsurance requires a home to be insured for at least 80% of the replacement cost but the exact percentage is contingent on your policy. Homes that are not adequately covered will not have their claims fully reimbursed upon a loss. The amount an insurance company may reimburse for homes with a coinsurance policy provision may be determined using the coinsurance penalty formula which is the amount of insurance divided by the amount of insurance required (amount required is the replacement cost multiplied by 80%-100%) multiplied by the cost of the loss (cost of repair) minus the deductible. This formula will give you the value the insurance company may pay for an approved claim and the difference would need to be made up by the insured, hence why it is a considered a penalty. There is so much we should understand about our homeowner’s policy to ensure they work for us when we need them. How well do you understand your homeowner’s insurance policy? Below is a short pop quiz to help you test some of your knowledge. The answers can be found in this month’s nic pick section.

*Addition 4/18/22* Upon calling my own insurance company to confirm that my homeowners insurance is up to date I learned my insurance company, State Farm uses a tool to automatically adjust for replacement cost. Also, I learned about an opportunity to save some money on my auto insurance 🙂

How frequently should I review my homeowners insurance policy to determine replacement cost?

• Never
• Every 3-5 years
• Every 5-7 years

Is external water damage caused by flood generally included the coverage for a standard policy?AbsolutelyNo

Homeowners policies have 2 sections with section I comprising of 4 areas of coverage, A-D. What does coverage D insure?

• Loss-of-use
• General personal property
• Unattached structures in dwelling
• Dwelling and its attached structures

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