When purchasing your home insurance policy you will have an option to purchase a policy on an “actual cash value” or replacement cost basis. A policy issued on an actual cash value basis may be attractive as it will generally cost you less, however; it provides less coverage than a policy issued on a replacement cost basis. In the simplest terms, the actual cash value policy pays for covered losses less reasonable depreciation, while the replacement cost policy will pay to re-build the home without depreciation. In order to properly protect your property, you should purchase your home insurance policy on a replacement cost basis.
Homeowners must realize that the replacement cost and the market value are not the same. Your replacement costs do not need to account for the land under the foundation, below are some items to help you understand this important component of your home insurance policy.
So, what is replacement cost?
“Replacement cost” is the amount needed to rebuild the home to its pre-loss condition. The replacement cost of a home is NOT the market value of the home, its purchase price or the outstanding amount of any
mortgage loan and does not include the value of the land. “Market value” is the amount a buyer would pay for a home, including the land, regardless of how much it would cost to rebuild the home.
What if I’m buying a new home?
When you’re purchasing a new home, you will also be purchasing a new home insurance policy. When you get your appraisal completed, see if a replacement cost estimate is also available. You need to be confident that you have the right coverage on your new home. You can also consult with a local contractor or building association.
Does the replacement cost estimate change over time?
There are items, other than economic changes in the marketplace that can influence your replacement cost values. Make sure you are aware of them and update your coverage replacement cost amount when needed.
Have you remodeled or performed any home improvement projects? – When you upgrade or improve your home, you may increase your home’s estimated replacement cost. Contact your IronPoint Insurance agent and adjust your policy accordingly when you remodel or make improvements to your home.
Have there been any changes in the rate of inflation since your valuation? – Many insurance companies automatically adjust your replacement cost in an effort to compensate for increases in construction costs in your area. However, if there are certain conditions that increase the demand for labor and materials, and raise costs beyond normal inflation your coverage may not keep up. It is important to update your coverage amount each year to keep up with the changing economy
What drives the building material costs in your area?
Market conditions in your area may impact the amount it will cost to rebuild your home. Replacement cost estimates are influenced by supply of labor, demand for labor, and cost of construction materials. Staying abreast of the current market conditions in your area, and changing your coverage amount accordingly, will help you maintain 100% estimated replacement cost coverage for your home.
In summary:
Your home’s estimated replacement cost is different than its market value (real estate cost). Each time you remodel or improve your home, you should adjust your coverage amount accordingly.
If your home is made of unique building materials, make sure they are reflected in your replacement cost estimate.
Stay abreast of the fluctuating building costs in your area and update your coverage amount accordingly. Make sure that you maintain coverage at least 100% of your home’s estimated replacement cost at all times.
It is important to review your coverage annually and inform your agent of any changes you’d like to make; at IronPoint Insurance we are available to provide you an estimate along with your home insurance quote.
