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How Do Insurance Companies Equate the Value of a Property for Deductibles?

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    Based on Insured Value

    • Rather than paying a flat sum of money, like $500 or $1,000, toward your home's repairs after a loss, percentage deductibles are calculated based on the insured value of your home. For example, if your home has $200,000 of coverage and a 1 percent deductible, your deductible will be $2,000 before your insurance company pays any money. If the insurance amount increases, your deductible increases with it. Therefore, be sure you have the correct amount of insurance protection on your home.

    Reconstruction Cost

    • The price of homeowner's insurance is calculated primarily on the amount of coverage you buy for your principal dwelling. The more coverage you buy, the higher the cost will be. Since percentage deductibles are tied to this coverage amount, being overinsured results in unnecessarily high deductibles; too little insurance leaves you insufficient money to rebuild your home. Calculate your home's reconstruction cost and buy insurance approximately equal to that amount to have enough coverage without overpaying your deductible.

    Calculation

    • Your home's reconstruction cost has nothing to do with its resale value. An $800,000 home in a high-valued area may only cost $200,000 to rebuild. The reconstruction cost only considers the cost to rebuild. Contact a local building contractor to determine the approximate cost to rebuild your home or the average cost per square foot for similar construction in your area. Multiply the cost per square foot by the total number of square feet in your home. This should be the number on which your deductible is based.

    Insurance Company Adjustments

    • Traditionally, it has been the homeowner's responsibility to update the homeowner's insurance policy to ensure that the dwelling amount remains adequate. With the advent of percentage deductibles, some insurers update dwelling amounts automatically. Since the deductible changes with the dwelling amount, the insurer remains responsible for the same percentage of the reconstruction cost. Even though customers are responsible for larger deductibles under this system, they can be better protected in the event of a major loss.

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