Have you ever wondered why your insurance agent would recommend more homeowners insurance coverage than what you paid for your home? The reason is, they know that there is a significant cost difference between buying a three-bedroom home, and building one.
Replacement Value versus Market Value
The value of your home can be defined in a number of different ways. For our purposes, we would like to explain two of them, replacement value and market value.
A home’s market value is defined by the International Risk Management Institute, Inc. (IRMI) as “the price that would have to be paid to purchase an asset in its particular market.” In other words, what is your home worth if you were to sell it on the open market.
Replacement value represents the cost to rebuild your home in the event a covered event such as a fire or tornado. The replacement value for a home is not the same as its market value.
Replacement cost will always be more than market value. The reason that replacement cost is more the market value, is because it costs a lot more to rebuild a home than to buy one of a similar size and quality on the open market due to things such as the current cost of materials and labor.
To calculate your home’s replacement value, your agent will ask a number of questions such as the style of house you own or are buying. The number of rooms. The quality of the furnishings such as cabinets and windows. And a number of other things as well. They will plug this data into what is referred to as a replacement cost calculator and considering your zip code, it will calculate building materials and labor costs to completely rebuild your home. This is your replacement cost.
Considering the Coverage Option that is Best
Whether you are in the process of purchasing a home or updating your current home insurance, it pays to take the time to consider the option best for you. Take a look at the amount of coverage you have on your home. Is it enough? Will it leave you with a shortfall, or enough to rebuild the home? If you have questions or doubt, give us a call, we would be glad to help.