Lately, there’s been a lot of buzz about replacement cost when owning a home, and why the insurance companies are requiring it. But what exactly is replacement cost and why is it so important? Let’s take a closer look…
Replacement cost is the price that it will take to rebuild your house in the same spot, same size, and same quality of construction, at today’s costs. Although this type of coverage is at times pricier than the “market value” price you paid for your home, replacement cost coverage will protect the property’s value against the dreaded depreciation due to the passage of time.
Lets say, for example, a home purchased in an inner city neighborhood may have a market value of $140,000. The exact same house that you purchased, located in a suburb of the city, may have a market price of $300,000. However, the cost to rebuild either house after a loss would be close to the same at both locations, the only difference would be the cost of labor for the different neighborhoods. Market value is simply the price you paid for your home. Because the real estate market can fluctuate so significantly, insurance companies use the replacement cost valuation rather than it’s market value counterpart.
For insurance purposes, you should insure your home to 100% of it’s replacement cost. This will guarantee the ability to rebuild the entire house, the way it is now, in the event of a total loss. It also guarantees that should there be a partial loss, the insurance company will replace the damaged items without deducting for depreciation
There are a couple things to be aware of when reviewing your policy. Replacement value can change over time, so it’s important that you review your policy annually to make sure its coverage meets your needs. Any upgrade or improvement made to your home is important to notify your insurer because these alterations may increase your home’s estimated replacement cost. Also keep in mind that construction costs (rising labor, materials, and transportation) in any given area can directly affect your home’s replacement cost in addition to your premium.
We hope we helped explained the difference between Replacement Cost and Market Value a little better. Call us today if you would like more information. We are always here to help!