How Do Insurance Companies Determine Home Replacement Value?Posted on Nov 29, 2016
A home is the single biggest investment you’re likely to make in your lifetime. It’s important to protect that investment. This means that you need to not only have insurance protection, but also have an appropriate amount of insurance coverage so that if your home is damaged or needs to be replaced, you will have an insurance policy that is up to the task and doesn’t leave your family in a state of limbo.
Understanding how insurance companies determine the value of your home can help you buy homeowners insurance with confidence that you’re getting the right coverage amount to protect your investment.
What Replacement Cost is NOT
Before you sit down and start crunching numbers, there are a few things you should know. The replacement cost is NOT any of the following things, much to the surprise of countless homeowners throughout the country:
- The purchase price of your home or land.
- Mortgage balance.
- Home’s market value.
The common mistake people make is only insuring the home for the value of the home at the time of the sale. That number is substantially different from the amount of money it will take to rebuild or even repair the home. It also doesn’t take into account things like room additions, remodeling, upgrades, and other investments you’ve made into the home along the way – or the increasing values of property and costs of things like building materials, building permits, and labor.
What Does Affect Your Home’s Replacement Value?
When it comes to the replacement value of your home, there are many things that affect the number. One of the best things you can do, for the sake of maintaining adequate insurance coverage, is to obtain a replacement cost estimate for your home. This can often be done in conjunction with the appraisal but you may also be able to obtain one from a reputable builder in your area or consult with your insurance agent for suggestions.
A replacement cost appraisal will consider things that impact the rebuilding costs of your home such as its unique features, if it has a finished basement, non-standard living areas, custom windows or molding, and countless other things that add value to your home.
One tool you can use to estimate the building costs of your home, should rebuilding become necessary, is the Building Cost Calculator from Building-Cost.net, which is free to use. These are some of the factors insurance companies take into account when calculating the replacement value of a home:
- Location of the home.
- Year of construction.
- Year of last major upgrades.
- Types of upgrades.
- Total square footage of the home.
- Foundation and building materials for the home.
- Roof (materials, installation, last update, etc.)
- Quality of craftsmanship in the home.
- Fireplaces within the home.
- Building materials (interior and exterior).
Don’t forget, though, that this doesn’t factor in costs for thing like code upgrades, debris removal, etc. that may be necessary when rebuilding a home that’s been damaged by windstorms, fires, lightning, tornadoes, vandalism, or other covered events.
How Do Insurance Companies Come up with Their Numbers?
As far as insurance companies are concerned, replacement costs are the costs necessary to rebuild or repair your home with building materials of similar type, quality, and style that were used in the initial construction of your home. That’s what insurance companies look at when evaluating the replacement value.
Some policies include a specific amount to help with the costs of updating your home to current code requirements and regulations, but it is wise to consider investing in a law-and-ordinance rider for your policy to account for anything above and beyond what your policy provides – especially if you own an older home that may require more extensive updating.