Replacement Cost vs Market Value

You finally made it through the home buying process and closed on your new home. Congrats on being a homeowner! After a couple of days living there, reality sets in and you receive a number of bills in the mail. Amongst those bills is a copy of your home insurance policy. You look through the policy and find yourself confused by the amount of coverage on your home. Why is the coverage amount on the insurance policy different than the value of the home? What’s replacement cost and what’s market value?

Replacement Cost

If you are unfamiliar with the term Replacement Cost, it is a term you should expect to see often the longer you own a home and insure it properly. Replacement Cost is an estimated value of reconstructing a home from the ground up in the event of a total loss (ex: house fire).

This estimate includes the cost of all new materials. Insurance agents use a Replacement Cost Estimator, which is a tool that estimates a home’s Replacement Cost when all the necessary info on a home is entered properly.

So, if you’ve wondered why insurance agents have so many seemingly pointless questions about a new home purchase, it is so they make sure they have an accurate Replacement Cost Estimate.

Market Value

The common mistake people make is confusing Replacement Cost and Market Value of a home. Market Value takes into account the location of the home, age, the value of nearby homes, among other factors. The key difference between Market Value and Replacement Cost is that Market Value is the value of your home as it is now.

So, say your home was built in 1930. You will almost certainly see the Replacement Cost higher than the Market Value due to the cost to rebuild as is in our current year.

Insurance Options

Most of the time homes will be insured at their replacement cost. If there is a mortgage on the home, insuring at replacement cost is probably required. However, the other option is to insure the Actual Cash Value of the home.

Actual Cash Value takes into account depreciation of the home and is more likely to line up with the market value. Insuring a home at Actual Cash Value will still cover the full amount of partial losses to the home.

However, in the event of a total loss, the full cost to rebuild as-is will most likely not be covered. Agents will quote based on Replacement Cost unless otherwise instructed, or in difficult insurance scenarios (ex: a large number of claims).

Insure It Right

It is very important to insure your home correctly. After a loss is the worst time to find out you don’t have enough insurance on your home. The agents at CRG take the time to gather enough information about your home. We do this not only get an accurate Replacement Cost Estimate but also so you know your home is protected.

An agent you can trust to customize your insurance and protect your well-being is a priceless asset. Home insurance is not something to leave up to chance, insure it properly with CRG.