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We Put $80k of Renovations Into Our Home. Do We Need to Report It to Our Homeowners Insurance?

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A couple talks to their contractor about their kitchen renovation.

Homeowners naturally know that the price tag for remodeling and improvements can be high. An average kitchen remodel, according to Home Advisor, costs more than $40,000, while a lavish makeover that includes custom cabinetry, fancy tile backsplashes and restaurant-quality appliances can run more than $130,000.

A financial advisor can help you plan for major home improvement projects and make sure they don’t derail your financial plan. Connect with a fiduciary advisor today.

One thing that you may not be accounting for in your home renovation budget: higher homeowners insurance.

What Is the 80% Rule for Homeowners Insurance?

A couple discusses their home renovation project with their contractor.

Under most homeowners insurance policies, your coverage needs to equal at least 80% of your home’s current market value. According to the National Association of Insurance Commissioners, if your coverage “drops below 80% of the full replacement cost of your home, your insurance company may reduce the amount that it will pay on a claim.”

The idea that even modest home improvements can push the value of the property up should be no surprise to homeowners. But it also means that homeowners should know that their insurance premiums could go up, too. If they don’t keep the level of coverage at 80% of the home value, they may forfeit receiving complete repairs or replacements.

Home improvements aren’t the only thing that can increase the value of a home. Inflation can also push a home’s value beyond the 80% level, leaving unwitting homeowners on the hook to receive only partial repairs or replacement if their home is damaged.

Imagine the owner of a $400,000 home updating their kitchen and bathrooms, spending $80,000 on the project. Before the work was done, the minimum 80% coverage level for full replacement was $320,000. After the improvements, the home’s new market value increases to $480,000. However, the old insurance coverage of $320,000 covers just 67% of the home’s new value. To meet the 80% rule, the homeowner’s insurance policy should be increased to $384,000 worth of coverage.

If the owner doesn’t inform the insurance company and raise their coverage to bridge that $64,000 gap, damages to the property won’t be fully covered. While a financial advisor may not be able to help you purchase homeowners insurance, they can potentially help you plan and save for your that expensive home renovation.

Do I Need to Report an $80k Home Improvement Project?

A couple looks over the plans for their home renovation project.

In addition to informing your insurance agent about the change in value, you also should let your mortgage holder know about the increase. However, it’s unlikely to make any difference in your payment that’s typically included in the boilerplate language of most mortgages.

Your mortgage terms are also likely to require a minimum level of coverage for your property. Your mortgage servicer will find out if the tax assessment for your property increases. Finally, your mortgage terms might include a requirement for the lender to review any major renovations, especially where the risk is that an unfinished project might lower the value of the home.

It’s best to talk to your insurance agent before any renovation work, not only to find out if you’ll need to raise your coverage limit but also to find out whether your property liability terms cover any injuries to tradespeople doing the work. For a major project, you also may want construction insurance, which covers theft and damage to building materials, vandalism, fire and other risks. If you won’t be living in the home while the work is being done, you might be able to take out construction insurance to replace your home insurance, giving you one less bill to pay for a few months.

One more thing: Your state may require you to let the tax assessor know about improvements that raise the value of your property, which also can increase your property tax. As you can see, there’s a lot of consider when undertaking a home improvement project. A financial advisor can help you plan and save for the unexpected expenses that you may incur during a home renovation.

Bottom line

Making even a modest improvement to your home could increase the value of your home and result in your homeowners insurance falling below the 80% home value coverage requirement. As a result, it’s important to report home improvements to your insurance company and potentially update your insurance policy to ensure you receive the maximum amount of money if your home is damaged or destroyed.

Homeowners Insurance Tips

  • Talk to your insurance agent before undertaking anything beyond minor improvements and additions to your home. A homeowner’s check-up with several different insurers every year or two is a good way to keep your coverage up to date and see if you can get a better rate.
  • While financial advisors don’t typically handle homeowner’s insurance, they can ensure that your financial plan isn’t at risk because of the costs associated with owning a home. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/skynesher, ©iStock.com/andresr, ©iStock.com/zamrznutitonovi

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