Insuring home against price drop doesn't seem like a good investment - Chicago Tribune

Q: Can you provide information about home value protection insurance? It provides protection for homes to prevent home values dropping. When you sell home, it will supposedly provide the difference of lost value of home during the sale.

A: You can buy life insurance coverage to protect and assist your loved ones if you die. You can buy mortgage payment protection insurance that will make your mortgage payments in case you lose your job or die. You can buy homeowners insurance to protect your home in case of fire or wind damage. You can even buy special insurance policies to protect you against floods and earthquakes.

Each of these insurance coverages has a cost. Since you could easily go broke buying insurance policies, you have to assess the relative risk/cost ratio for each possible event and figure out what you need to buy to protect your loved ones and investments.

We've gone through a huge swing in real estate home prices, and while home prices in some areas are still going down, it seems that overall the real estate market is at or near its bottom. We are not prepared to say we have hit bottom, but some markets have started to rebound, others are moving sideways, and still others with high foreclosure rates are still suffering.

With that said, it is our belief that you should buy a house, townhome or condominium to give you shelter and a place to make a home for yourself and your family. When you place the highest priority in making that piece of real estate your home, you're looking at other characteristics to help value that decision: the schools, the community, the ability to commute to your place of business, and proximity to relatives, friends and houses of worship. These factors differ from an investment decision when you buy stocks, bonds or even investment real estate. These investment assets will never be the home you live in.

When you buy stocks, bonds or investment real estate, you have the ability to buy other products that can hedge the bet you are making in business. You can buy options to protect your investment in a stock or you can buy different type of insurance to protect your investment in a bond that could default.

When it comes to your investment in your home, you can protect your investment with homeowners insurance as well as several other policies we've described. But there's a big question about whether buying the insurance you have suggested would be a wise placement of your hard-earned money.

We would also question the cost involved and whether the company offering you the insurance would be around to back the policy at some future date. Finally, as we have seen so much fraud in the residential market over the last 10 years, you'd have to make sure this company is a real company, with substantial assets set aside, so that if you had a claim (because you had to sell the home for a price that was less than you paid), you would actually receive a financial benefit.

Finally, if you are thinking about purchasing this type of insurance policy, and the price is small, aren't you buying the home in a market that many people would be considering the low end of the market? Where was this company when prices were twice as high as they are now? Would they have sold policies then, and would they have the ability to withstand the shock that occurred with the drop in the real estate housing market?

We suggest you take a pass and instead use the cash to pay down your existing mortgage and building equity in your home.

(Ilyce R. Glink's latest book is "Buy, Close, Move In!" Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce's radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website, www.thinkglink.com.)