If you have homeowners insurance, it’s imperative that you understand the difference between the market value of your home and its replacement cost because when you experience a covered loss, your insurance company will pay the “replacement cost” of the damaged property up to the coverage limits. Here’s what you need to know.
What is replacement cost
Replacement cost is the amount needed to repair the damage or to rebuild a home to its pre-loss condition. The replacement cost of a home is NOT the market value of the home. The market value of the home depends upon the location, neighborhood, school system and many other factors unrelated to construction. The exact same house may cost the same to build in a wealthy neighborhood and a low income area, but the market value will be far different.
Some important things to consider when determining your coverage amount
- Your home’s estimated replacement cost is different than its market value (real estate cost).
- Each time you remodel or improve your home, you should adjust your coverage amount accordingly.
- If your home is made of unique building materials, make sure they are reflected in your replacement cost estimate.
- Stay abreast of the fluctuating building costs in your area and update your coverage amount accordingly. Make sure that you maintain coverage at 100% of your home’s estimated replacement cost at all times.
- It is important to review your coverage annually and inform your insurance advisor of any changes you’d like to make.