If an insured owns a $200,000 home but only insures it for $100,000, how much will the insurer pay if the home is destroyed?

The correct answer is that the insurer will pay $100,000 if the home is destroyed. This scenario illustrates the concept of "insurance to value." In many property insurance policies, the insured is generally encouraged to insure the property for its full replacement value to avoid a penalty in the event of a total loss.

Since the home is worth $200,000 but insured for only $100,000, the policyholder is under-insured. In the case of a total loss, the insurer typically pays the lesser of the amount insured or the actual cash value, depending on the terms of the policy. Here, because the home is insured up to $100,000, that amount is what the insurer will pay, reflecting the policy limit.

This consequence serves to reinforce the importance of properly valuing and insuring property to ensure adequate coverage. If the home had been insured for its full value, a higher payout could have been expected in a total loss situation.