Whether you're actively house hunting, or are already a homeowner, insuring an older home can be challenging. Our local area is full of pre-1940 homes, especially in certain neighborhoods in Bellefontaine and Urbana (Scioto Street anyone?) Read on for the main reason why homeowners insurance for an older home is challenging and a great solution for one of the most frequent challenges- insuring at replacement cost.
Homeowners insurance policies use replacement cost to set the amount of coverage on the house
Replacement cost is simply the cost to repair or replace the house using TODAY's available materials and labor. You can read a much more detailed description about replacement cost in our article, "Do I Need Replacement Cost Coverage on My Ohio Homeowners Insurance Policy?". However, homes built before approximately 1940 were built using materials and labor that is NOT readily available today. Here's a few examples of some of the construction differences between older and newer homes:
- Hand milled trim/baseboard
- Plaster walls
- True 2 x 4 studs
- Trim/baseboard available at a local home improvement store
- Machine milled 2 x 4 studs that aren't quite 2 x 4
So if those materials are no longer available and the skilled tradespeople who used them are no longer with us, it makes sense that to rebuild the house with "older" technology would cost more right? When items are scarce, their value increases. Think of baseball cards, antiques and other memorabilia.
But if we can just make a run to Lowe's, Home Depot or the local lumberyard to buy off the self supplies, then that convenience equals lesser money. Same with hiring a contractor- finding a plasterer is virtually impossible nowadays since most homes are built using drywall.
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But replacement cost on older homes equals much more coverage and more premium
So the biggest issue we run into when insuring an older home is the fact that the replacement cost is often much more than what a newer home would be. And this results in an often unpleasant side effect- more premium out of pocket. No one likes that answer.
Let's be honest- unless your older home is a famous museum, would you rebuild it EXACTLY as it is? Probably not. So if there was an option to insure it differently, making it more affordable as well, would you like that idea? Luckily, there are some insurance companies that are recognizing this problem exists and offering a solution that works very well.
Introducing Functional Replacement Cost- a solution for insuring older homes
Functional Replacement Cost is a great option for insuring older homes. The idea is simple- the replacement cost is calculated using modern materials, so the final coverage amount on the policy is lower. Honestly, if you don't intend to rebuild an older home exactly as it stands today, why insure it that way?
Due to the amount of older homes (pre-1940) in both Bellefontaine and Urbana, we're finding that Functional Replacement Cost is becoming a very popular option for homeowners insurance.
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A real-life example
Recently I was asked to insure a beautiful two story brick home built around 1900. It's around 2500 square feet in size with a basement, porch and 1 car attached garage. Replacement cost clocked in around $445,000. However, by adjusting my assumptions in the replacement cost software to show modern construction, the replacement cost dropped to $372,000. This number is the Functional Replacement Cost. The policy contract allowed me to adjust downward to 80% of that figure, so the final amount of coverage on the house was $300,000.
I spoke to the homeowner and asked a very important question, "If something happened to this house, would you rebuild it exactly as is?" He replied, "No."
Again, this option is perfect when you do not want to rebuild the house exactly as is. It allows you to adjust your coverage to a more realistic level and hopefully have a more affordable premium.
If you have an older home in Bellefontaine, Urbana or the surrounding area, and would like to discuss this option for your homeowners insurance, please give us a call at (937) 592-4871. You can also submit a quick quote request form and we'll get right back to you. We would love to help you! Please note: not every insurance company offers this option for you- we're glad we can!
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