Your Financial Future: Is Your Home at Risk Because It’s Underinsured?

It was one of those things that you look at, file away and forget. The letter from my mortgage company said that it appeared my house was underinsured. It wasn’t until more than a year later, after I read High Wire: The Precarious Financial Lives of American Families, by Peter Gosselin, that I dug the letter out of the file to find out whether I had adequate coverage.

I was lucky: It turned out the mortgage company had the wrong policy number and I was adequately insured. But an estimated 66 percent of U.S. homes are underinsured by an average of 18 percent, according to a recent survey. Most families only find out the hard way—after their homes are destroyed.

That’s what happened to Julie and Dan Peck, whose avocado farm and the house where they had lived for 35 years were burned to the ground by wildfires that swept through Fallbrook, Calif., in October 2007. The Pecks had been evacuated by the sheriff’s department; when they returned, only chimneys were standing. The house where they raised their four children, the outbuildings and the avocado trees, which they used to supplement their retirement income, were all gone.

“Everything in the house was decimated and everything around it,” said Julie Peck. “All those years of hard work. Our heart and soul went into that place, and it was destroyed completely.”

Peck said when the insurance company inspected the house many years ago, it set the coverage amount, and they hadn’t built on any additions since. They assumed that the policy was adequate because, said Peck, they were “assured by the insurance company that the yearly increases in coverage were keeping up with rising building costs.” But after the fire, they learned that their insurance coverage was only for about half of the estimated cost of rebuilding the same home.

In the 16 months since the fire, the Pecks, who are 68, have been living in rental housing, paying to clean up and maintain their old property and watching their retirement savings being ravaged by the market. “We can’t rebuild,” she said. “We can’t sell. And we can’t really afford to take on debt to go buy another place, so we’ve just been constantly trying to figure out how to handle this situation.

Losing a home and not being able to replace it would be a blow to most families’ finances. As Gosselin points out, “For the great majority of Americans, by far the most valuable single asset they will ever own is the house they live in.” According to a survey of consumer finances published by the Federal Reserve, in 2007 the primary residence accounted for 31.8 percent of total family assets. For the least wealthy homeowners, it was 47.1 percent.