Real estate gains could leave you lagging on insurance

Buying a home is getting more difficult. But owning one can be a nice lesson in wealth accumulation. The average price of a home in the United States is now over $125,000, according to the Commerce Department.

Though many homeowners, especially the ones living in houses they bought in the 1970s or before, happily contemplate all the ``wealth'' they've amassed, they may have forgotten to contemplate their homeowner's insurance. Because of rapid appreciation of home prices and the almost equally rapid rise in construction costs, many homes are simply underinsured.

The rule of thumb is that to be fully insured, at least 80 percent of a home's replacement value should be covered. But getting to that 80 percent may not be as easy as it sounds.

Anybody who has hired a contractor lately to put in a kitchen, rewire a house, put on a new roof, rebuild a porch, or add a bathroom knows what these professionals cost. Home construction costs for the first six months of 1988 went up as much as they did in all of 1987, American Appraisal Associates reports.

This is why insurance adjusters and consumer groups remind people to think of a home's replacement cost instead of its market value when looking at insurance coverage.

``People can go too high or too low with their insurance,'' says Robert Hunter, director of the national Insurance Consumer Organization (NICO) in Washington, D.C. ``It's something you have to monitor.''

The greatest risk in not being fully covered isn't the possibility of a total loss of the home, since that doesn't happen very often, Mr. Hunter says. Rather, the bigger risk is not having enough insurance to cover a partial loss because the house was only partly covered.

Let's say you bought a house several years ago for $80,000 and had it insured for 80 percent of its replacement cost, or $64,000. Now, thanks to the boom in real estate prices, its replacement cost, including the land, is $150,000. To meet the 80 percent rule today, it should be insured for at least $120,000, since most people don't have fire insurance on their land or foundations. Over those years, however, you've ignored or set aside - to deal with ``some other time'' - those reminders from the insurance company to get your coverage up to date.

So now, with $64,000 of coverage instead of the $120,000 it needs, your home has only about half the proper amount of coverage.

Should there be a partial loss, a $5,000 kitchen fire, for example, the insurance company would pay for only about half the repair. Had the home been insured up to 80 percent of its current replacement cost, the coverage would have been complete.

``Anything less than 80 percent and you're not going to get the full payment for that kitchen fire,'' says Robert Watson of the Amica Mutual Insurance Company in Providence, R.I. ``That's why we spend a lot of time and effort to tell our customers to keep up their coverage.''

Like a lot of other insurance companies, Amica offers a special endorsement, or inflation protection coverage, that automatically increases the amount of insurance (and the premiums to pay for it) each year based on a commonly accepted formula, usually one from American Appraisal Associates.

With this endorsement, ``we will cover any loss, no matter what the value of the house is,'' Mr. Watson says.

While the inflation-adjusted coverage may be adequate for a few years, homeowners should not just buy it and forget about it, Hunter of NICO advises.

``I wouldn't trust it,'' he says. ``The adjustments are based on national or regional home appraisal indexes, not local prices.''

Home prices and replacement costs can vary from town to town and, in a large city, from neighborhood to neighborhood, Hunter points out. So he checks the recent sale prices of homes and land in his area every three or four years. ``I try to figure out what the land is worth,'' he says. ``I want to be at 80 percent, no more, no less.''

There are also kits available from most insurance companies that can be used to help assess the value of your home, says Thomas Mallin, vice-president and general counsel of the Property Loss Research Bureau, a division of the Alliance of American Insurers.

If you find the kit too confusing or you don't know how to figure the value of your home, getting an appraisal isn't too difficult. For a few hundred dollars at most, a professional appraiser will do the job. Also, many real estate agents and brokers have appraisal training, and one of them can give you a figure for about $100 to $200.

That's not much to make sure your home is properly covered.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.