“Why is my home replacement cost so high? I can’t sell my house for that much!”
This is probably one of the most common questions asked by our clients, whether they are new clients who have just purchased a home, or existing clients who are renewing their home insurance coverage. Home insurance replacement cost versus market value can be particularly confusing and frustrating during a declining real estate market because while housing prices may be going down, insurance values are still going up. Market prices have little to no bearing on the home insurance coverage you should purchase. Home insurance coverage is typically based on the cost to rebuild a home, not what the home could sell for or what it is appraised for by the local municipality for tax purposes. When you buy home insurance, the insurance company is promising to rebuild your home in the event of a disaster, which is why replacement cost is so important.
Replacement Cost vs. Market Value
Market value is the amount a buyer would pay for a home, including land, regardless of how much it would cost to rebuild the home. Replacement cost is the cost necessary to rebuild the entire home from the ground up. We recommend that you purchase coverage that is equal to your home’s estimated replacement cost. Insurance agents and companies use specialized formulas to determine the estimated replacement cost of a home based on specific characteristics of the house, including square footage, construction type, style of home, and quality of building materials.
Here is an example to illustrate the difference between replacement cost and market value: imagine that there are two houses- one is a waterfront property with ocean views and the other is the same exact house (sq footage, quality of construction, etc.) in a downtown urban area. The market value of the waterfront house will likely be significantly higher than the market value of the house in the city. However, the replacement cost is very similar, if not the same, for both houses. The cost of construction – building materials, labor, etc. – would be similar no matter where the house is located.
When evaluating the replacement cost of your home, it’s important to tell your insurance agent when you upgrade or improve your home. Significant home renovation projects typically increase the estimated replacement cost of your home, so you may need to adjust your policy to meet your home insurance coverage needs.
If you have any questions, or would like one of our customer service representatives to take a look at your policy and make sure you have the proper replacement cost coverage…call us at (401) 723-8510 or visit us online!