Homeowners Insurance: Rebuilding Your Home "As Is"

As the cost of labor and homebuilding materials continues to rise, the price of rebuilding a home can exceed the amount for which it is insured. According to insurance consultants Marshall & Swift/Boeckh, 58 percent of American homes are underinsured by an average of 21 percent. If destroyed, these underinsured homes will not be rebuilt at the same size or with the same quality materials.

Some insurance companies take the rising cost of labor and materials into account by automatically covering an extra 20 percent in replacement costs above the original insurance amount. Marshall & Swift/Boeckh includes this coverage in its estimates of underinsurance, however.

The gap can grow dramatically, depending on the age and location of the home. Homes typically are insured for the correct amount at the time of purchase. As time passes, however, costs rise, and the gap between the homeowners insurance amount and the rebuilding amount grows. The longer the homeowner has been in the house, the bigger the gap. Replacement costs vary by region as well. Labor rates and material costs tend to be higher in metropolitan areas than in small towns. Homebuilding costs in coastal states are higher than in the heartland.

Another factor driving underinsurance is the home improvement craze. Television programs like "Design on a Dime," "Trading Spaces," and "Flip this House" have taken the fear out of remodeling and have shown what a few upgrades can do for the value of a home. Kitchen cabinets, granite countertops, hardwood flooring, vinyl windows and doors, new decks, and room additions can add thousands to a home's value. According to Remodeling magazine's "Cost vs. Value Report," the average kitchen remodel costs $54,000 and adds about $43,000 to the value of a home. A kitchen and bath remodel alone will put a $300,000 home outside the range of "kicker" coverage. Any increased costs beyond that only add to the underinsurance.