Replacement Cost vs . Market Cost
When you purchase a homeowners insurance policy , you ’ ll make a number of decisions about your coverage . One of the most important is whether to insure your home for its replacement cost or its market value . Understanding each option will help you make an informed choice that safeguards your home and your family ’ s financial future .
What Is Replacement Cost ? Replacement cost is the cost necessary to repair or replace your entire home . When you insure your home for its replacement value , your insurer will reimburse you for the cost of rebuilding or repairing your home , based on the size and structure of the home that was lost or damaged . The most accurate way to determine the replacement cost of your home is to hire a building contractor or other building professional to produce a detailed estimate . Only the cost of the property ’ s structure and its associated systems , fixtures , and finishes will be included in the estimate ; land value is included in a home ’ s market value but should not be included in the amount of insurance you buy .
Benefits In the event of a loss , replacement cost coverage will help your family return to their home and usual quality of life with minimal financial interruption . For the best protection , experts recommend that you insure your home for at least 100 percent of its replacement cost .
Risks Replacement value can change over time , so you should review your policy annually to make sure its coverage meets your needs . Inform your insurer if you have upgraded or improved your home , because these alterations may increase your home ’ s estimated replacement cost . Also , you ’ ll want to stay informed about changing market conditions in your area . Rising labor , materials , and transportation costs can directly affect your home ’ s replacement value . For maximum protection , consider a policy that includes an inflation clause that automatically adjusts coverage and premiums to account for changes in construction costs .
Carl Schindler , LUTCF , CSA Agent , State Farm Insurance
Carl Schindler is a 41-year State Farm Insurance agent in Morgan Hill . His agency has been voted # 1 in Morgan Hill for the past 5 consecutive years . He specializes in Auto , Homeowner ’ s , Life & Disability Insurance . Visit StateFarm . com / CarlSchindler or call ( 408 ) 779-6969 .
What Is Market Value ? Market value is the amount that a buyer would pay to purchase your home and its land in its current condition . Unlike your home ’ s replacement value , its market value is influenced by factors beyond the material and labor costs of repairs or reconstruction , such as proximity to good schools , local crime statistics , and the availability of similar homes . Also , the land itself will be included in the home ’ s market value , although it will not be covered by the homeowners policy .
Benefits In some cases , market value coverage may be the most practical option . Take the example of an ornate older home . In today ’ s market , the cost of rebuilding or restoring artisanal woodwork , masonry , and plastering to their original condition may be much higher than the home ’ s purchase price . Therefore , the replacement policy premiums for the home would be high . ( Special policies are available for some historic homes , but these also come at a higher price .) For a cash-strapped homeowner , buying a policy based on market value offers the best chance to recoup at least partial expenses after a loss .
Risks When you insure a typical home for its market value , you are at risk of having incomplete coverage . For example , imagine that a family buys a home for $ 175,000 and takes out a homeowner ’ s policy for the same amount . The replacement cost for the home , though , is $ 225,000 . If a fire or other insured event destroys the house , the insurance settlement would be $ 50,000 less than the actual replacement cost of the home . The family would either have to make up the difference themselves or build a new , less expensive home .
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