My husband and I have a loan but my insurance company wants us to insure the house for more than the loan. Why?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Insurance companies insure your home based on the replacement cost of the home, while your loan is based on the retail value of the property. Sometimes the replacement cost is well below the real estate value but in some areas of the country the cost to rebuild is actually higher than the purchase or loan value of the property. You and your husband should ask your insurance agent how they arrived at the replacement value of your house. If you think it is out of line you can check with other insurance companies to see if you can get a lower amount of insurance, or you can speak with a contractor who may be able to assist you in getting lower insurance. (Contractors can give a cost per square foot that may be lower than the one being used by the insurance company. It is an option, but not a very popular one in the insurance industry.) However, you need to be careful that you are not underinsuring your home. If the house is a total loss due to a covered peril you want to be sure you have enough insurance to rebuild. Many insurance companies provide a cushion, known most commonly as extended replacement cost, which is a percentage of the amount of insurance that can be used in the event your insurance is low. This percentage can range from 15% up to100% of the amount of insurance.

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