Replacement cost insurance provides enough coverage to completely rebuild your home at current prices. it is the main component of your home insurance policy and is included in your policy as the homeowners coverage.
The replacement cost of the home is not the same as the market value of a home. replacement cost only covers the cost of rebuilding the home. market value is affected by factors such as land, location, school district, and other factors.
Having the right amount of home insurance is vital to ensuring you’re covered if you file a claim. you don’t want to find out after a catastrophe that you didn’t have enough insurance.
There are a few ways to calculate the replacement cost of your home. You can have an appraisal done, use a home replacement cost calculator, or just do it yourself. Read on to learn more about calculating your home’s replacement cost and making sure you have the right coverage.
what is the replacement cost for homeowners insurance?
The replacement cost of your home is how much it would cost to rebuild your home with similar materials if it is damaged or destroyed. replacement cost is tied to the amount of coverage you select and the amount your insurance company will pay you if you file a claim.
When you buy homeowners insurance, the major coverage in the policy is the homeowners coverage. There are two types of policies: actual cash value and replacement cost insurance. standard homeowners insurance policies use replacement cost.
You must select an amount of homeowners coverage that covers the cost of repairing the damage to your home or completely rebuilding it to the same quality, at current prices.
You can also add extended replacement cost coverage to your homeowners coverage. This home insurance policy endorsement insures your home beyond the estimated replacement cost. typically set at 125% or 150% of the replacement cost of the home.
why would you need an extended replacement cost policy? inflation can affect the cost of rebuilding, leaving you underinsured.
Another type of replacement coverage is a guaranteed replacement cost policy. Guaranteed replacement cost insurance pays the full cost of rebuilding the home, even if you exceed dwelling limits.
Is homeowners coverage the same as replacement cost?
Dwelling coverage is the part of your homeowners insurance policy that pays to rebuild or repair the structure of your home if it is damaged or destroyed. it only covers the physical structure of your home and not the contents.
Replacement cost is one of the approaches used to calculate the amount of homeowners coverage needed. therefore, on a replacement cost homeowners insurance policy, they are the same number.
how to determine the replacement cost of your home
In most cases, your homeowners insurance company will use a proprietary home replacement cost calculator.
“Typically, an agent must estimate the cost of the home,” says Kirchen. however, since many people don’t use agents these days, it can also be done on the company’s website or by a representative over the phone.
If you’re not happy with the number or just want to verify that it’s correct, you can do it yourself. Options range from using a calculator to hiring a professional appraiser.
An independent appraiser is probably the most accurate method of calculating a home’s replacement cost value.
“an independent appraiser will accurately and accurately inspect your home and know exactly the full cost of rebuilding your home. plus, they know the building codes related to home rebuilding in their area,” says brandon.
replacement cost versus actual cash value homeowners insurance
There are two approaches to home value and how it affects homeowners insurance. are replacement cost and actual cash value.
You must insure your home at replacement cost, but there are policies that use actual cash value instead. There are some cases where you may not be able to get replacement cost coverage, usually when the home doesn’t qualify due to its age, condition, or location.
Let’s break down the two options.
actual cash value (acv)
An actual cash value policy takes depreciation into account when calculating your payment. depreciation can make a big difference on a large claim.
Although each insurance company has a different formula for calculating depreciation, a standard method is to determine the expected useful life of a product and subtract a certain percentage for each year since it was purchased.
As an example, if your roof was 15 years old at the time of the claim and had a useful life of 20 years, it will cover most of the cost of a new roof.
The same applies to your possessions, although this falls under personal property coverage and not homeowners coverage.
“if you paid $1,000 for a TV six years ago and its useful life is 10 years, you’re looking at $100 in depreciation for every year you’ve owned it, or $600, which means your claim check will be $400” explains kristofer kirchen, president of advanced insurance administrators. “Now apply that same idea to everything else you own that was destroyed.”
replacement cost coverage
A policy with replacement cost coverage will cover rebuilding costs, regardless of depreciation.
For example, if a fire destroyed your home and possessions, your homeowners insurance policy would pay to rebuild your home at current market rates, even though rebuilding costs have likely increased over the years.
>
The same goes for your possessions. if you had upgraded your homeowners insurance policy to the replacement value of your personal belongings, you would be receiving a television of similar size and quality, no matter the cost.
While most standard homeowners policies cover the physical structure of your home at replacement value, many assign actual cash value coverage to your personal property. you must add a replacement cost endorsement on the personal property to make sure you are covered that way.
An important point of a replacement cost value policy is the 80/20 rule.
“Your primary single-family residence should be insured for at least 80% of the replacement cost of the property,” says patti clement, senior vice president of hub international’s private client services division.
If not, insurance companies may not cover the full cost of your home.
“Although 80% is the minimum requirement for replacement cost value, it is always highly recommended that our customers insure their homes for full value,” says Clement.
Replacement cost claims can be paid in two installments with insurance companies paying actual cash value initially and then reimbursing the difference after repairs or if you purchase a replacement item.
many homeowners insurance companies are phasing out actual cash value when it comes to homeowners insurance, at least for the structure.
“structure replacement value coverage is becoming much more popular with major carriers; however, ownership can go either way depending on the company,” says luke kinton, an insurance agent in madison, alabama.
The level of coverage on your home affects the coverage on your possessions, since personal property coverage is a percentage of the home’s coverage limit.
“Your personal property coverage is about 50-70% of what your structure insures,” explains Carole Walker of the Rocky Mountain Insurance Information Association.
The lesson here is that your personal property may be underinsured if you don’t have enough property insurance on your structure.
While it is still possible to purchase an insurance policy that covers the structure of your home at actual cash value, it may incur some significant costs for you. If a catastrophic event destroys your home and possessions, your share of the bill can easily run into the tens of thousands of dollars.
Price will vary based on a number of factors, but in general, expect to pay approximately 10% more to upgrade your insurance to replacement value.
replacement cost value versus market value
market value is what your home is worth in the real estate market.
that’s usually much higher than the replacement cost. replacement cost calculations take into account only the structure. It doesn’t take into account land costs and other things that affect market value, like whether it’s on a corner lot or in a great school district.
why? because even if your house burned to the ground, you would still have the land.
That’s why you shouldn’t use market value when measuring homeowners insurance coverage. In fact, you can get much more home insurance coverage than you need by using the equity in your home.
“The cost of rebuilding is not market value and customers have a hard time accepting it,” says kinton. “A house may sell for $250,000, but the cost to rebuild may be $120,000 and the latter amount is what the underwriting will cover.”
Most insurance companies will write a policy for more than the calculated replacement cost value at your request, but it is not required. using replacement cost with an extended or guaranteed endorsement will adequately protect you.
factors that affect the replacement cost of your home
Dealing with the aftermath of a fire or tornado is hard enough without worrying about the cost of rebuilding your home. That’s why it’s essential to carry the right amount of home insurance.
We’ve covered why market value doesn’t affect replacement cost, but there are many factors that do.
Here are some factors that can affect the cost of rebuilding:
age
If your home is older and has features that are difficult or expensive to replicate, like custom plaster and molding, or if it’s full of outdated plumbing and electrical, the cost of rebuilding can be even higher than a new home. new.
build codes
this mainly affects older houses. While homeowners are generally not required to update their homes every time building codes change, if your home is destroyed and needs to be rebuilt, current building codes will apply.
Most insurance policies are designed to allow for building code changes.
location
Where you live can also affect replacement cost, as the cost of building materials varies from place to place. a home in a remote location may have much higher material costs simply because of the cost of transporting them.
using a home replacement cost estimator
You can calculate the replacement cost of your home yourself using a calculator, but it requires a little legwork, including calculating square footage costs in your areas.
If you’re not sure how to calculate the replacement cost of your home, just follow a few simple steps. To calculate the replacement cost, first determine the construction cost per square foot in your area, then multiply it by the square footage of your home.
The National Association of Home Builders has estimated the average construction price to be between $100 and $155 per square foot. The average cost to build a new 2,000-foot home is between $201,000 and $310,000 depending on its location. the northeast has the highest average cost per square foot ($155), while the south has the lowest ($100).
So how do you calculate the replacement cost value of a home? Brandon says homeowners should calculate these factors when using a home replacement cost calculator:
- Roof Materials: Enter the type of roof you have to calculate replacement.
- Floor Type: This can be broken down into percentages if you have more than one type of flooring, such as carpet and hardwood.
- exterior features: these include patios, outdoor kitchens, decks, and pools.
- Interior Features: These include bathroom and kitchen fixtures, appliances, and cabinetry. these are usually categorized by grade, including builder grade or high-end selections.
- foundations and footings
- structural framework and materials
- roof condition and materials
- ceiling
- outer walls
- interior walls
- plumbing and electrical fixtures, wiring and piping systems
- heating and cooling equipment and systems
- interior finishes including walls, doors, cabinets, built-ins and other custom touches
- Craft Building Cost Calculator: This tool requires you to enter information about your home and then provides a replacement value report.
- my bluebook: This site pulls publicly available information about your household. enter some additional details and the site will give you a replacement value figure. In addition, you can put together a complete inventory of the house.
- housing cost: You need to enter some basic information about your home and address to get a fairly detailed report.
- Inventory: A detailed home inventory is essential. Document all your belongings, including serial numbers, date of purchase, and price paid.
- Re-evaluate Annually: Check your local construction cost insurance policy each year, as construction costs can increase dramatically from year to year. Check with your insurer about an inflation protection rider. the rider automatically adjusts the limits of your home to reflect the latest construction costs.
- make a video: document the interior and exterior of your home. include items such as appliances, mechanics, floors, cabinets, ceilings, and any other structures on your property.
- high-value items: “A standard homeowners policy has minimal coverage for jewelry, furs, silver, and other high-value collectibles,” Clement advises. you may need a rider for these items to be fully covered.
Remember that only the structure itself is included in this calculation, and not your personal property.
what an independent appraiser uses to create a home replacement cost estimate
An independent appraiser will come to your home and do a thorough inspection, taking photos and videos of your home. in most cases, they will examine the following:
The appraiser will also research local market rates for construction, material and labor costs to produce a report on your home’s replacement value.
The cost of an appraisal can vary dramatically between locations, but expect to spend a few hundred dollars at least.
use an online insurance replacement cost calculator
While not as accurate as the DIY model, online calculators can help determine your home’s insurance replacement value. some options are free, while others come with a fee.
tip“it is best if you do the math yourself or hire an independent appraiser simply because your home insurer determines your replacement cost based on their own software without actually doing a proper inspection of your home to give an estimate precise. a home insurance company may not be the best for you,” says brandon.
here are some home replacement cost calculators to try:
Check out each of the home replacement cost calculators to see which one works best for you. When you have an exact replacement cost, you can use our home insurance cost calculator to compare rates.
avoid under insuring your home
David Marlett, Ph.D., CEO of Brantley Risk & Appalachian State University Insurance Center comments on the risk of having an underinsured home in the current climate.
q. What could pose the greatest risk of under insuring homes right now?
a. The biggest risk of underinsurance today could come from changes in building values. since the arrival of covid, building materials have increased dramatically. You may have had the right amount of coverage two years ago, but you may not be able to rebuild your home to the same condition at today’s prices.
q. Given the recent changes in construction costs, what should homeowners do?
a. You may want to contact your insurance company or agent to discuss the specifics of your home and adjust your home insurance coverage, if necessary.
q. How does an underinsured home affect those who experience a loss due to fire?
a. In the event of a loss due to fire, homeowners must rebuild on the spot, and inadequate coverage may make it necessary to withdraw savings or rebuild a more modest structure than the one that currently exists.
final tips for replacement cost coverage
The difference in price between an actual cost value policy and a replacement cost policy is usually quite affordable. can be a financial lifesaver if you suffer a major loss.
Here are some final tips on replacement value insurance for both your home and personal property:
For most homeowners, replacement cost coverage is the best option. Make sure you have accurate estimates for your replacement cost and check that you’ve added the necessary endorsements to provide extended coverage if needed.
