Understanding Homeowner’s Insurance Replacement Cost

“I could never sell my house for this much!”

It seems like at least once a week we receive a phone call with a concerned customer inquiring about the replacement cost on their homeowner’s insurance versus the market price of their home. The market price of your home is set by; you guessed it, the market. As such, the market price can fluctuate greatly over time, and is impacted by the location of your home, the “curb appeal”, the size of the lot, current interest rates, supply and demand of homes, and even the popularity of the architectural style of your home. Essentially, the market price is what you could expect to sell your home for under normal conditions.

Conversely, the replacement cost is the estimated cost of what it would take to rebuild your home in the event of a total loss. Replacement cost is impacted by the age of the house, the square footage, features of the home, the average cost of materials & labor, and location. The location factor helps to demonstrate how the two values differ. The market price uses location in terms of how desirable or undesirable an area is, whereas replacement cost uses location in terms of how expensive it is to get materials or the cost of labor for the reconstruction of the home or debris removal.

The replacement cost in homeowners insurance is to return the insured to the ‘status quo’ in event of a total loss.

For example, let’s say that your house has a market value of $140,000** and your homeowners insurance agent suggests that you insure the house for $180,000 (replacement cost) but you decide to insure the home for only $140,000. If there was a fire or a hurricane that destroyed the house, you would be shy $40,000 if you wanted to rebuild your house and you’d have to pay the difference out of pocket. This is also true for a partial loss. If the home is under-insured, you would also be responsible for a portion of the damages, even if the total damages are less than the value you have the house insured for.

Another all too common occurrence is when people chose to insure their home for the same amount as the loan on the home. The problem with that is that in the event of a total loss, your insurance money could be only sufficient to pay off the mortgage but insufficient to restore your quality of life after the total loss.

If you are concerned the replacement value of your home is inflated, you can always contact your homeowner’s insurance agent a call and we can reassess the cost to rebuild your home. After your home is impacted by a fire or a hurricane, there is no way to describe the feelings of loss that can affect you. Treasured family photos, wedding presents, childhood mementos are forfeited and there is no way to replace those. The last thing you want at that moment is to realize that financially, you and your family’s standard of living are now in jeopardy as you struggle to regain a sense of normalcy and safety. That’s really what insurance is for – to provide you with peace of mind.

**These examples are all generalizations. All policies are unique and your policy should be consulted for your exact coverage’s.