If you’ve watched or read the news within the past year, you are aware that the home sales market has made headlines on numerous occasions. More often than not, these headlines are often accompanied by stories relating to the worst economic situation this country has seen in years.

Mixed in with these stories, we are also informed about tragic accounts of apartment buildings going up in flames or homes flooded with water – people’s lives forever altered in a matter of minutes.

What is the common link between all of these stories?

To someone who has not lost their home due to a natural disaster or owned a home before, the amount of insurance needed to protect their biggest asset may not be a primary concern.  But after 25 years in the insurance industry, the debate over the market value of a home versus replacement cost value of a home is one that I, as an insurance advisor, continue to face every single day.

In a down-turning home sales market, the buyer has the advantage.  More homes are available to someone who wants to buy at astronomically low prices.  But does that really change how much it would cost to rebuild that house if it suffered major damage?

As professional insurance agents, it’s our responsibility to identify and recommend how much insurance our clients should purchase to properly protect their assets.  And let me tell you—right now, in this economy, the market value of a home does NOT equal the replacement cost.

Here’s an example:

Let’s say there is a home for sale and based on the location and size, its replacement value is $200,000.  The list price, however, is $150,000.  The realtor negotiates a great deal and the final sales price ends up being $125,000.

Should the owner insure the home for $125,000 because that’s what he or she paid for it?  NO!  The home should be insured for what it would cost to rebuild that home if it suffered a total loss, i.e. the replacement value.

If the home was insured at $125,000 but it cost $200,000 to rebuild, that owner would owe $75,000 or more in the event of a total loss on his or her home.

These are the kinds of misunderstandings that insurance agents face almost everyday. The misconception is that most agents are trying to “over insure” their clients when, in essence, they simply want to protect them accurately. 

Remember, the best agents are the ones who will take the time to educate their customers!

- Robin Price