If you’re like most people, your home is your largest investment. As such, you want to buy enough insurance coverage so that if your house and its contents are significantly damaged or entirely destroyed, you can replace them.
Unfortunately, its easy to underestimate the amount of money needed to rebuild your home and replace your personal property. In fact, recent studies have shown that coverage on a substantial percentage of U.S. homes is inadequate due to incorrect evaluations of replacement cost. Sometimes these evaluations are incorrect at the time the coverage is initially purchased. Other times, homeowners make upgrades and additions to their home and personal collections and do not tell their agent or insurance company of their need to increase coverage.
What is the difference between actual cash value, replacement cost, and market value?
Replacement cost is generally the cost to completely replace your home in the event of a total loss, using materials of like kind and quality, and includes current cost of labor and materials. Some companies have caps on replacement costs others do not.
Actual cash value is generally the amount to replace your home minus the portion of its life that has been used. Actual cash value takes into consideration the age and condition of your home and its construction.
Market Value is generally the price that the real estate marketplace will pay, at a given point in time, for your house. This, of course, also generally includes the property on which it is sited. Interestingly, market value often is not the same as the assessed value of your home by taxing authorities ) as evidenced by a large number of home sales that do not equal the assessed tax value)
How is the replacement cost of my home determined?
There are a number of ways replacement costs can be analyzed. Some of the key considerations in such a calculation include the number of stories of the home, its age, its size or square footage, the quality and materials used in its construction, and any attached structures like garages. This program is constantly updated to consider changes in material prices, labor, and other costs.
What happens if I don’t have enough coverage on my home and I have a loss?
Generally, in the event of a covered loss, your insurance company is bound for the cost of the repairs or replacement of your home up to the policy limit. For example, if your home costs $200,o00 to replace, but your policy limit is $150,000, you may be called upon to pay the difference or make adjustments in how your home is replaced. We can help you determine how much coverage is adequate for you.
What should you do to help your agent help you obtain and keep the right amount of coverage for your home?
Make sure you keep your agent informed and up to date on your house and its contents. For instance, any upgrades, remodeling, or additions to your home could impact its value and should be discussed with your agent. You should also discuss with your agent any higher value or collectible personal property that you own. Jewelry, fine art, antiques, musical instruments, electronics, sports equipment, and collectibles may be covered best under a schedule that provides unique coverage for those items in addition to your other personal property.
Replacement Cost Vs. Market Value
Imagine how devastating it would be to lose your home in a fire or natural disaster. Now imagine not being able to rebuild it completely because you didn’t have the correct amount of insurance.
“Coverage A” or “Dwelling Coverage” on your policy declarations page is the amount you are currently covered for. Ensuring your home for anything less than 100% insurance to value could mean you wouldn’t have enough coverage to replace your home in the event of a total loss.
Replacement Cost is what it would cost to rebuild your home to its original condition, and it is based on square footage, type of home, and the cost of materials and labor in your area. The average cost to rebuild a typical home is $150 per square foot but can be much higher if you have granite countertops, hardwood floors, or a finished rec room in the basement. It is important that you insure your home based on its reconstruction cost, NOT its current market value.
Market Value reflects current economic conditions, taxes, school districts, the value of the land and location, and what comparable houses in your neighborhood sell for.
Assessed Value is what your property tax is based on, which varies by municipality.
If you’ve made improvements or additions to your home such as a deck, gazebo, fencing, or additional structures, please give us a call so we can make sure your home is adequately protected.
Renters Insurance Do I really need renters insurance? Watch the video below to find out.