Over the last several years, since the beginning of the housing market decline, there is a very good chance that your home is worth less. Despite this fact many people still wonder why home insurance premiums remain the same compared to 2005 rates or higher.
One reason why insurance rates remain steady is that the cost to rebuild a damaged home has not changed much. Therefore, you most likely are paying as much or more to insure your home as before the housing bust, unless you have reduced coverage or increased your deductible.
According to Robert Hartwig, president of the Insurance Information Institute, "The price of homeowners' insurance is based on the cost to repair or rebuild your home. The price of a home is based on the market value of that home and the land upon which it sits." Despite the fact that the housing market crash hit the construction industry hard, the overall cost of labor and materials needed to rebuild a home has not gone down.
According to the most recent data available from the National Association of Insurance Commissioners, after rising nearly 62 percent between 2000 and 2007, the average premium for homeowners insurance did dip by nearly 4 percent in 2008, to $791.
However that small decline was not due to a decrease in the cost to insure a home, but rather many homeowners made changes to their policies like increasing their minimum deductible or dropped additional coverage options to save some money on their premium.
"We saw people do things to pinch pennies any way they could," Hartwig said.
Tobie Stanger, senior editor at Consumer Reports said that "Although it's tempting to try to reduce your coverage amount when your home price falls, that can be a costly mistake. This is one thing we always say to the consumer: When you see your home value going down, don't assume that you can drop the value of your homeowners' insurance."
One way people may save money on their premium is to have a higher deductible, but that can be a risk particularly if you do have a claim. Then the homeowner will need to find a way to come up with more cash on their own.
In today's insurance market even if a homeowner tries to reduce their homes' insurance coverage, they may find that their options could be limited.
There is a very good chance that it's possible that the cost to rebuild a home could actually be more than what the home could be sold for according to J.D. Howard, executive director of the Insurance Consumer Advocate Network.
Furthermore, the home insurance policy must be high enough to cover how much is owed on the homeowners' mortgage, even if that's more than the current value of the home.
Stanger also said that it's a good idea to shop around to see if another provider can get you the same coverage for a lower price.
A recent survey found that about half of those who switched insurance carriers in the last four years were, on average, paying less for coverage.
A word of caution, even though a homeowner may find another insurance carrier with a great insurance rate, they should not buy a new policy based primarily on price alone. It's recommended that the homeowner check consumer websites and their state department of insurance website to make sure that the insurance carrier will that care of them in the event that there is a claim.
J.D. Howard said, "When you're buying insurance, all you're buying is a promise."