You just bought a new home, congratulations. Maybe you are reviewing your existing homeowner’s insurance policy. You might be scratching your head wondering something: “Why is my home insurance replacement cost more or less than the home’s market value?”
It’s a great question. You might think your insurance coverage should match the home’s market value. However, insurance replacement cost doesn’t always align with market forces.
Table of Contents:
- Understanding Homeowners Insurance
- Market Value vs. Replacement Cost
- When Dwelling Coverage Is Less Than the Market Value
- Situations Where Dwelling Coverage is Above Market Value
- Changes in the Home Insurance Market
- Protecting Your Home With a Good Home Insurance Policy
- Frequently Asked Questions
- Conclusion
Understanding Homeowners Insurance
Homeowners insurance helps protect your property. This includes its contents from various disasters. Events like lightning, wind, hail, explosions, fire, and theft are typically covered.
Anyone financing a house needs to have homeowners insurance. Protecting your property is critical.
The Four Pillars of Section 1 Coverage
Let’s get specific about what Section 1 of a typical homeowner’s policy covers. The parts are dwelling, other structures, personal property and loss of use. Knowing each one of these can give some perspective to “home insurance replacement cost”.
Dwelling: This protects the actual structure of your house. Garages and decks/porches get coverage here as well.
Other Structures: As the name implies, it’s coverage that protects the structures that aren’t attached to your home. Sheds, detached garages, pools, fences, and driveways are protected under this section. This is typically 10 or 20 percent of the dwelling coverage, but you can buy more.
Personal Property: All of your possessions inside that are not physically a part of the home are protected. You could be looking at a range of 50 or 70 percent of the total dwelling coverage.
Loss of Use: Living expenses are real. Think of staying at a hotel, or possibly even buying food for takeout from restaurants while damage is fixed. This section typically is set for 20 or 40 percent of dwelling coverage, and you may consider requesting to purchase more coverage, but this could increase your overall home insurance cost.
Market Value vs. Replacement Cost
Market value and replacement cost are certainly not the same thing. Dwelling coverage is all about the home insurance replacement cost. This is how much money is needed to replace your home if it were destroyed.
Market Value: If your home sold today, this would be its true market value. The location of the property plays a factor here. Land value, the market conditions and other real estate things also play a critical role.
Replacement Cost: Let’s say your home was destroyed. Regardless of location, it is simply how much money it would take to completely rebuild it. A good comparison for what replacement cost would look like can be found in your everyday home systems, for example, how much it would take to replace your hot water heater if you couldn’t do repairs.
Think of a three-bedroom, two-bathroom, 2,000 square foot home. Let’s say it was built on a smaller lot of land in Uxbridge, MA. It could possibly sell for around $300,000.
The very same exact house built at the same time on a bigger lot in Wellesley, MA, could sell for $800,000. The market value is not what is critical to insurance companies. The replacement cost would actually be the same because the houses cost the exact same to rebuild.
Calculating Home Insurance Replacement Cost
Agents must think of things like the home’s square footage. Things like rooms, HVAC systems, materials, and the style of roof all need considering.
The zip code helps decide the local prices of materials and labor. After it is all entered, inspectors have to visit. Adjustments might happen then.
Coverage should be around 100% for most cases. If it were lower than 80%, damage coverage would likely be restricted. Homeowners will generally add on something called “extended replacement cost” for even more dwelling coverage.
There could be scenarios that could cause prices to dramatically change. Take the event of a natural disaster destroying several local homes, for example. An increase of 25 to 50 percent dwelling coverage with “extended replacement cost” is a possibility, and maybe something you may want to explore with your agent.
| Factor | Consideration For Value |
|---|---|
| Square footage | Size Matters. |
| Materials Used | Are we talking standard, or premium? |
| Location of the Home | Labor and materials could change between locations. |
| Additional Features | Finished basement? Customized Kitchen? |
| Outdoor Factors | Inground swimming pools will affect costs. |
When Dwelling Coverage Is Less Than the Market Value
As we’ve been talking about, the sale price of the house included factors not needing to be factored into coverage. The land being an important part of this thinking.
A more desired neighborhood could impact the final amount needed for homeowners insurance. This is really just for a rebuilding payment and there would already be land ownership.
Situations Where Dwelling Coverage is Above Market Value
Did you simply get an amazing deal for your property? Perhaps there was a purchase from a bank-owned home. Market conditions often determine some of these circumstances too.
Older houses often have more appreciation too, which could mean you paid less. Newer construction costs of building homes in this modern time of similar materials will have to be considered for insurance.
In some situations, some homes have high market values due to various premium updates. These things, like modern, top-of-the-line HVAC systems, would definitely need a look. It may all mean higher coverage, possibly above that home’s market value. Many agents, such as the ones at USAA, offer additional information and online portals to help assess your own property needs.
Changes in the Home Insurance Market
Since COVID and current inflation rates, pricing on construction and new home materials has certainly gone up. There have been delays. Inflation will have an effect on insurance as well.
Having communication with your agent is even more important these days. Home insurance companies such as American Family have plenty of details online to help in situations just like this. Staying on top of communication each year should help address any questions you may have as you renew your homeowners insurance policy each year.
Protecting Your Home With a Good Home Insurance Policy
There are a few things to keep an eye on to help give you the protection you will likely want in the event you need it. Be aware of what the right deductible amount you should elect based on your specific financial profile. Many experts, such as the ones you can reach with Travelers insurance online, recommend re-evaluating your homeowner’s policy once every few years. It is something that is simple enough to put in your calendar.
Consider these simple ideas for savings when renewing each year.
- Be proactive and preventative with your home and home systems. Things like regularly fixing up something like your chimney and its various parts is always cheaper to fix ahead of time than to have to repair it after it’s completely failed.
- Ask about bundling all your policies under the same insurance carrier to see what discounts could apply.
- Consider your property’s risk for fire when choosing landscaping or add-ons to your home.
Frequently Asked Questions
What is the difference between actual cash value and replacement cost coverage? Actual cash value pays to replace your home or belongings minus depreciation. On the other hand, replacement cost coverage pays the full cost to replace your home or belongings with new items without any depreciation deductions.
How is replacement cost calculated for my home? Insurance companies use various factors, including your home’s square footage, building materials, features, and local construction costs. They often use specialized software and may conduct a physical inspection to determine the accurate replacement cost.
What is extended replacement cost coverage? This optional coverage provides an additional buffer, typically 20-50% above your dwelling coverage limit. This extra coverage can help rebuild your home if construction costs surge due to increased demand after a widespread disaster.
Can I insure my home for less than the replacement cost? While you can, it’s generally not recommended. If you experience a covered loss, and your home is underinsured, you will likely have to pay out of pocket to cover the difference.
What should I ask before I pick from all the different insurance products? Be sure to discuss the various optional endorsements. Also understand if you need flood insurance, or if you want higher limits than offered for certain things. You might also ask for quotes with different deductible amounts, to help understand costs.
Conclusion
Understanding your insurance policy should make some more sense now. Getting that homeowners insurance policy should provide the confidence knowing you and your property have coverage.
Making sure that you understand home insurance replacement cost will only make that insurance policy even more valuable. Use the tools mentioned here to feel secure in your insurance coverage.
Looking for a quote on your home insurance? Get started here: https://www.insurewithrichardson.com/quotes/