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PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 3964
Experience:  Tax professional and business consultant for 35 years.
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Regarding purchasing a new home - a house with 2050 SF - 1479

Customer Question

Regarding purchasing a new home - a house with 2050 SF - 1479 finished up and 575 finished down on a walk-out basement in an older home - 1975 for $127,900.

Getting insurance quotes - most of the insurance agents tell us not to worry about the basement for coverage and a few of them say yes, worry about the basement. Obviously, including the basement costs more money. Looking for words of wisdom.... what to do

Carolyn
Submitted: 3 years ago.
Category: Finance
Expert:  PDtax replied 3 years ago.

PDtax :

Hi from Just Answer. I will be assisting today.

PDtax :

The value of a finished basement is not the same as upstairs, which historically costs around $100 per foot. Basement remodels can be done for much less, since the walls and floors are started and can be final surfaces.

PDtax :

At $60 or so per square foot to buy, insuring the home has to address not only the cost of coverage, but what you are insuring. Is it the current value, replacement value, or another method? Let's assume replacement value.

PDtax :

I personally like to advocate for larger deductibles to cut coverage, but I don't know if that is appropriate in your area. Just another idea to save some $.

PDtax :

You may ask your agents if not insuring the basement would have a coinsurance type effect. here's what I mean.

PDtax :

Home is in a fire, and suffers $60,000 in damage to the first floor and basement. If you don't insure the basement, and it's 575 finished sq. feet, will your insurance only pay for 1/2 or 2/3 of the claim? That's very possible.

PDtax :

It's also likely that your basement will be more prone to flooding (if the sewer/septic fails, or a sump pump fails). Just a thought as well.

PDtax :

Lastly, do you have the means to self-insure that risk for not covering the basement? If the basement would cost $8,000 in materials and another 16,000 in labor/profit to remodel, can you do it? Maybe you are handy and can remodel yourselves. if so, you could probably skip the basement insurance.

PDtax :

I normally tell people to insure against risks that would ruin them if not insured. If the bank will allow you to only insure much of the property, and you can rehab the basement if something does happen, then don't insure the basement.

PDtax :

I might suggest instead that you choose a larger deductible to reduce your premiums, especially if you can handle the small claims costs yourselves. Choosing a $2,000 deductible on the whole property might be smarted than not insuring the basement. More risk coverage and some money saved.

PDtax :

I hope that gives you what you were looking for. Ask any follow up you have, and thanks from Just Answer. I'm PDtax.