Protecting Your Investment – Residential Property Insurance

Peter Lynch once said, “Before you do invest anything in stocks, you ought to consider buying a house, since a house, after all, is the one good investment that almost anyone manages to makes.”

There is no doubt about that statement made by Peter Lynch, as buying a house for their children and loved one is every person’s dream. For most people, the first and probably only property investment has become their biggest investment and it carries a huge responsibility which includes their obligation to service their mortgage, paying taxes and maintaining their property. One of their many challenges is to protect them from suffering of financial losses due to unforeseen circumstances such as fire damages, naturally disaster and many other perils that could happen without any warning.

Purchasing an adequate insurance coverage for their property is thus of utmost important. Many new house buyers have face the problem of deciding how much is enough to cover for their property. Insuring too high, will be a waste of premium as insurance company would not pay anything higher than its actual cost. Insurance too low, will run the risk of being under insured whereby they would have to bare the proportionate cost of repairs and reinstatement of the property to it pre-damage condition.

One of the simplest ways is to follow the Property valuation report, most properties if mortgage to the bank will require a property valuation report unless the property is totally new. In every property valuation report, there are always 3 values of the property stated apart from the purchase price of the property;

  1. The Market Value of the property
  2. The Force Sales value of the property
  3. The Insurable value of the property.

More often than not, the insurable value of the property is between the market value and the force sales value. This insurable value represents the amount of cost that the property will need to rebuild in the even of a total loss after an insured peril.

Most property owners including some mortgage officers always confuse with the purchase price and insurable value, they often take the purchase price or market value as the sum insured of the property when arranging for the insurance. While this is a common practice, the owner is paying extra premium unnecessarily.

A more accurate way is to ask this question, “If my property is totally destroy, how much money I will need to rebuild it to the same condition before the loss?” And the rebuilding cost will generally exclude the land, drainage and sewage and foundation which seldom destroy after the insured perils, unless of course the damage is caused by a catastrophic earthquake.