The first question to ask yourself when buying homeowners insurance is: Do I include the land value? Although land does not burn, it may be a significant cost if the house is destroyed. In addition, it may be difficult to value land as an asset. In areas that have high risk of flooding, land may become uninsurable. You can consider buying additional insurance to compensate for this potential cost. But keep in mind that you will be paying more than the land’s worth.
The answer depends on your insurance company. Some lenders require homeowners to insure the land for one-sixth of the total appraised value of the home. Usually, you don’t want to overinsure your land, but you should never underestimate the value of your land. In addition, some mortgage lenders require you to insure your entire mortgage. In such a case, you are the one who will pay the freight.
If your mortgagee requires you to pay for the insurance, he will require you to pay the market value of the property as a proportion of the mortgage amount. This value is different from the replacement cost because it considers other factors, such as crime rates and location. Generally, the market value includes the land itself, which is not covered by your homeowners insurance policy. Nonetheless, if you’re thinking of buying homeowners insurance, remember that land value can increase your property’s market value.