You buy home insurance to protect your home should a disaster occur and you need to rebuild it. But how do you know how much to insure it for? Sure, you know the value of your home, but that’s today. What’s the cost to rebuild it in the future when something could happen? This is the issue you face.Shop and compare insurance quotes.
So how do insurance companies determine your home replacement value? Keep reading to find out.
Understanding Replacement Value
First, it’s important to understand that replacement value isn’t the market value of your home. It’s also not the purchase price of the home. It’s the cost to rebuild or repair your home. That cost could be vastly different from the day that you purchase your home. So how do you make sure that you have proper coverage?
Your insurance agent should offer you the option for replacement value coverage. The insurance company uses a calculation base on the industry averages to rebuild a home to come up with your replacement value. This calculation includes the cost of material and labor. Again, this won’t be equal to your home’s market value. The market value includes the value of the land, which you won’t need to rebuild, so it’s not a part of the replacement value.
Verifying Your Replacement Value
It can be tempting to accept an insurance company’s replacement value, but what if it’s wrong? You could find yourself without adequate insurance in the face of disaster. This is not the ideal time to find out. Rather than risking it, verify the replacement value offered by an insurance company with the following steps:
- Find out the average construction cost per square foot in your area
- Think of any upgrades you have in your home that could increase the cost of rebuilding
- Consult with a professional appraiser
You can do the legwork and the math yourself if you want to save some money. Just make sure you kept careful records of any upgrades you made and that you can find out the current average cost to rebuild/replace your home at today’s rates.
If you want a professional’s opinion, though, it could further verify the value the insurance company provided. This way you know beyond a reasonable doubt that you have enough coverage. An appraiser can tell you the current construction costs for a home like yours so that you know how close your coverage is that the insurance company will provide.Shop and compare insurance quotes.
The Risks With Replacement Cost Coverage
You may have already guessed that there can be an issue with replacement cost coverage. If you figure out your home’s replacement cost today, that doesn’t mean the cost will be the same moving forward. Let’s say you have a home disaster in five years. Chances are that the costs to rebuild/replace your home in five years will be different than today.
Construction costs including labor and materials change often, which could affect the replacement cost of your home. You may also make upgrades and certain areas of your home may deteriorate. Each of these factors plays a role in how much it costs to replace your home. We recommend revisiting your home insurance policy on an annual basis to make sure that you have adequate replacement cost coverage.
Actual Cost Coverage versus Replacement Cost Coverage
Replacement cost coverage typically costs more than actual cost coverage, but you get better protection. With actual cost coverage, the insurance company will only reimburse you for the cost of rebuilding the home today minus depreciation. Let’s say you’ve been in the home for 10 years. The insurance company would deduct the predetermined value for depreciation for 10 years. This could leave you with quite a deficit when it comes to paying to replace your home.
Replacement cost coverage is the most common type of coverage on home insurance today. Actual cost coverage often isn’t adequate and leaves homeowners with financial issues. Make sure that you shop around with different insurance agents to find out the average replacement cost coverage offered to you as well as to compare the premiums/deductibles available to determine the right insurance policy for you.Get the right insurance coverage.