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How Much Insurance Do I Need?

For most people, the answer to this question is obtained when they first buy their home. At that time, a valuation is customarily done and the valuation report will state the sum recommended for insurance. If they are getting a mortgage loan, the Bank will usually insist that the house be insured for a sum not less than that stated in the valuation report.Unfortunately, thousands live in their home for several years and never change the amount of their house insurance. In a time of increasing costs, this can be very dangerous to a homeowner. It is like playing Russian roulette.Let’s examine a case where a homeowner Mr. I. N. Trouble buys a property for $600,000 at which time the cost to replace the building is $400,000. At that time, he buys insurance on the building for $400,000. After a period of 10 years, let us assume that his building will now cost $600,000 to replace. However, he has never increased his house insurance…and… DISASTER!…his house is fully destroyed.

Mr. I.N. Trouble will be entitled to a cheque for $400,000. (the amount of his house insurance). However, to replace the house he had, it will cost him $600,000 and as a result, he will have lost $200,000. The worse is yet to come. In obtaining his mortgage loan, his house insurance was assigned to the Bank that carries his loan. The cheque from the insurance company will therefore go to the bank first, and only be released to him in some format, if and when he rebuilds his house.

O.K. you say, but a house is rarely 100% destroyed. What if it is only 60% destroyed? Surely Mr. I. N. Trouble will get the full $360,000 (60% of the replacement cost of $600,000.) as his insurance is $400,000? The answer is NO. In this scenario, he will get $240,000. This represents 60% of what the house is actually insured for (which is $400,000.) and therefore, he will be short $120,000 i.e. $360,000 (the cost of repairs) – $240,000 (insurance proceeds).

This clearly shows the danger of sitting back and not paying attention to your house insurance. For all of you who are guilty of not checking to see if your house insurance is sufficient, please contact a qualified expert. It may be a Quantity Surveyor, Engineer, Architect, Valuer or Contractor.

Their fee will depend on the value of your home, and will generally be between 1/6 – 1/3 of 1% of its value (i.e. divide the value of the building by between 600-300). While it may appear costly at first, it is definitely worth it when compared to what you might lose.

It is also important to select the insurance company very carefully. A major consideration is that the company is financially sound. In addition, it should have a good reputation for settling claims. While cost is a factor, it is not a good idea to select a company solely by the insurance premium. The sum you save now may not seem worth it when you are having difficulty in obtaining a settlement cheque for your loss. Finally, having a good insurance agent is also very advisable. You want an agent who is knowledgeable in insurance and has an interest in your needs.

Do not procrastinate. The time to get professional advice is NOW. Contact a professional or G.A. Farrell & Associates Limited.

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