As financial advisors, we often come across aspects of people’s financial lives from which others may benefit.  This is one of those times that relate to any homeowner.  As a homeowner, your house is likely one of your most valuable assets. It’s where you build memories, offer shelter to your loved ones, and, importantly, where a significant portion of your financial wealth is invested. Considering recent economic shifts, reviewing your homeowner’s insurance is crucial to ensure it adequately covers the rising costs of replacing your home.

The Escalating Cost of Home Replacement

Over the past few years, home construction costs have surged due to various factors. Supply chain disruptions have increased the prices of building materials, such as lumber, steel, and concrete. Additionally, labor shortages in the construction industry have driven up wages, further inflating overall construction costs. Consequently, the expense of rebuilding a home today is substantially higher than just a few years ago.

With a rough estimate I obtained from a couple of home construction companies, the estimated cost to replace your home is $200 to $300 per square foot, depending on your level of finish and customizations.  While your 2500 square foot home insured for $450,000 might have been adequate five years ago to replace your home, today, the cost to replace would be closer to $500,000 to $750,000, again depending on your home’s level of finish.  If your coverage is $450,000 and hasn’t been reviewed in some years, and something happens to your home (fire, etc.), you might have to come out of your savings to rebuild your home.  This is worth avoiding.

I spoke with Meghan Feagans at Deeley Insurance (DE/MD Insurance Agent), who said, “It is important to note that what you can sell the home for is rarely the cost to replace the home. A ‘replacement cost valuation’ might be a great idea if you’re unsure what you should be insured for. This really makes sure your insured value will cover replacement costs.”  She added, “Make sure you understand your coverages. Gaps in coverage can be substantial.”  I couldn’t agree with her more. A review of your coverage may be in order currently.

Why Review Your Homeowners Insurance?

1. Ensure Adequate Coverage: Standard homeowners insurance policies are designed to cover the cost of rebuilding your home to its original condition. However, you may be underinsured if your policy has not been updated to reflect current replacement costs. This could leave you financially vulnerable in the event of a disaster. Regularly reviewing and adjusting your coverage ensures your policy keeps pace with market realities.

2. Avoid Out-of-Pocket Expenses: Inadequate insurance coverage means that, in the event of a total loss, you might have to cover the shortfall out of your own pocket. This could entail depleting your savings, taking out loans, or compromising the quality or size of your new home. You safeguard your financial stability and peace of mind by aligning your coverage with current replacement costs.

3. Account for Home Improvements: Many homeowners periodically invest in renovations and upgrades, which can significantly increase the value of their home. Whether it’s a new kitchen, an additional bathroom, or a finished basement, these enhancements must be factored into your insurance coverage. A periodic review ensures that all improvements are accounted for, and your policy is updated accordingly.

Reviewing your homeowner’s insurance in the context of rising replacement costs is not just a prudent financial move; it’s essential for protecting your most significant asset. By ensuring your policy is up-to-date and comprehensive, you can rest assured that your home, family, and financial future are safeguarded against unforeseen events. Don’t wait for a disaster to reveal gaps in your coverage—take proactive steps today to secure your home and peace of mind.

This article is written by Eric W. Johnston, CFP®, Financial Advisor and President of InFocus Financial Advisors Inc., whose firm focuses on the needs of people in retirement.  For questions or comments, he can be reached at 410-677-4848 or [email protected]. His website is www.retireinfocus.com.

Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker-dealer, and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.

Investments in securities do not offer a fixed rate of return.  Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.