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I Need a Vacant Home Insurance Policy, but What Amount Do I Insure For?

When someone realizes they need vacant homeowners insurance, one of the biggest problems they have is understanding how much they need to insure for. Under a vacant homeowners insurance policy, it is the responsibility of any good agent and insurance company to insure for the full and total rebuild cost (reconstruction cost). Once cannot insure for the amount they want to insure for, or just cover the value of the mortgage. Any carrier that offers these terms should be viewed with skepticisim.

When most people estimate the value of their home, and guess at the rebuild cost, they almost always guess too low. Here is a formula THAT DOES NOT WORK.

Sale price of the house - What I think the value of the land is worth = The rebuild cost of the home.

There are many factors that make this a very weak formula when estimating value for a vacant homeowners insurance policy. First, there are market conditions to take into consideration. In 1999 a 1200 square foot home in a good neighborhood in the Silicon Valley sold for $850,000. Does that mean that is what it would cost to rebuild this small home, of course not. The rebuild cost may have been $180,000. For homes that sell for a lower sale price, the age of the house can cause a real problem with this formula. An 80 year old home in Sandusky Ohio may sell for $140,000 but at 2100 square feet and solid stone construction, the rebuild cost may be $240,000.

The best insurance for vacant homes will provide full replacement cost on the home. This means that for the most part, the same home has to be rebuild with new materials in the event of a total loss caused by fire. When estimating the "value of the home" for vacant home insurance purposes, this formula is much better, and it ignores the sale price, amount of land, quality of neighborhood, and the real estate market.

Square Footage + Quality of Walls + Quality of Roof + Number of Bedrooms + Upgrades + Type of Garage + Bathrooms + Type of Basement = Rebuild Cost.

Two homes, both of 2200 square feet can vary by $250,000 or more depending on the answers to these questions: cedar shake vs vinyl, 2 car garage vs. car port, finished slab basement vs. crawl space, 5 bedrooms vs. 3, 2 bathrooms vs. 3.5 etc. If the value of the home is not estimated properly, the insurance company can apply penalties and not pay the full claim at the time of loss.

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