You paid $165,000 for your home, but your agent here in Michigan thinks your ‘bargain purchase’ for a seasonal residence should be insured for $208,000. How can that be?

We get this question constantly being that our agency writes a lot of homes for newcomers to the Grand Traverse County area, so I thought an explanation might help our clients, future clients, and those who just want to understand how the evaluation of home insurance works.

When you purchase a home, you are doing so at the ‘Market Value’. If you look up the definition of Market Value, it will state that it’s the amount for which something can be sold on a given market.

Market Values therefore fluctuate with the economy, with areas of a community, with developments that are going on in that area. If the area has issues with poverty, major crime and lack of employment access, the market value becomes depressed and home values decrease accordingly. This happens because fewer people want to move to an area with those issues especially if they can’t feel safe. Therefore, home values decrease, becoming worth less from a market value standpoint.

Insurance however looks ‘only’ at one cost, and that is the ‘Replacement Cost’ of the home. How much is it going to take to tear down whatever is left and reconstruct the home with like kind and quality of materials and cost of labor. Therefore, when we are contacted for a quote on home insurance, we are so thorough asking everything from square footage of the home to built-ins to percentage of the flooring that is wood vs carpet. We aren’t being nosey; honest. We just must use that information for our system to calculate the cost today to replace your home.

When a home is located in a depressed area, vs a bustling growing area that people want to move into, the cost to tear down and rebuild it won’t fluctuate much other than the cost of labor and materials in that zip code.

Hopefully this will answer the question of why we sometimes insure a home for more and sometimes for less than what it costs to purchase; i.e. the market value.

As always, if you have any questions regarding homeowners or any of your other insurance needs, we are simply a phone call, email, or visit away.