Importance of Insurance to Value

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When it comes to the concept of "property value," insurance actually plays a very important role in the term's perception. Learn about the importance of insurance to value with help from an assistant professor of insurance at The American College in this free video clip.

Part of the Video Series: Information About Insurance
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Hello, I'm Kevin Lynch, I'm an assistant professor of insurance at The American College in Bryn Mawr, Pennsylvania. Right now, we're going to talk about the importance of insuring your property to it's true value. This is probably one of the most misunderstood aspects of most consumers homeowners policy. Most consumers believe that the value of their home is what they paid for, or the amount that their taxes based upon. Or, more commonly, the amount that they could sell it for today. All three of these values are valid, but none of them are valid when considering what your home's replacement cost or true value is. Why do you buy fire insurance, or more commonly known, homeowner's insurance? There's all kinds of benefits to owning a policy, but the main reason is because you're concerned about a catastrophic or total loss of your property. Now, if you want the protection necessary for a total loss, then you need to insure your property for the amount necessary to replace or reconstruct your home in the event of a total loss. As an exercise for yourself, call a builder in your area, ask him to quote you, how it would be to build the house that you own today, over again. I think, you'll be surprised to learn what that value is, when you compare it to the other three values we've already talked about. Let me address an unspoken concern of consumers related to property and casualty insurance, and insuring the value and premium dollars. No one wants your premiums to be higher than you do, including your agents. When premiums increase unfairly or above the competition, the agent is subject to losing your business. I point this out because consumers incorrectly assume that agents will jack up the values. So, they can charge a higher premium and thereby earn a higher commission. First of all, agents don't establish your premiums, companies do. Secondly, agents' commissions on fire policies are in the eight to 12 percent range. So, I'll use ten percent as an average for this next example I'm going to give you. Let's use a premium of 1800 dollars a year. On that amount, the agent would earn about a 180 dollars per year, or 15 dollars a month. If your premium was 2500 dollars a year, your agent would earn about 250 dollars or 20 dollars and eight three cents a month. So, the question is this, do you honestly think, your agent wants to lose your business over five dollars and eighty three cents a month? Insure your property for it's true value, the cost of reconstruction. And in the event of that catastrophe happening, you'll be glad that you did. I'm Kevin Lynch at The American College in Bryn Mawr, Pennsylvania. For more information, go to www.TheAmericanCollege.edu. We've just talked about the importance of insuring the value on your homeowner's insurance, thank you.

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