Market Value vs. Replacement Cost
Because we get asked this question so often, I thought it would be beneficial to briefly review the general concept and differences between the Market Value vs. Replacement Cost of a property.
Though there are multiple variables that goes into determining your home’s replacement cost for your Homeowner’s Insurance policy, it’s important to first understand how each valuation is determined in order to explain the differences between them.
Market Value
Market value fundamentally has to do with the basic principles of supply and demand. It’s nothing more than what a willing buyer will pay to a willing seller of a property. This value includes the cost of the land, the location of the home, and also takes into account how competitive the market is at the time.
As we’ve seen over the course of 2020 and into 2021, the market value of a property can vary greatly depending on what area of the country it’s located in, how desirable that area currently is, and how many families and individuals are competing as buyers.
Replacement cost (Rebuild Cost)
Unlike a home’s resale or market value, the replacement cost of a home is determined by looking solely at what it would cost to repair or rebuild the physical structure of the home back to original standard with materials of like kind and quality, including the home’s built-ins. This also includes costs such as hiring a contractor and purchasing the raw materials for the rebuild.
Replacement cost differs from a property’s market value, the cost of the land, and from the amount owed on a mortgage. Using these values by themselves or using a mixture of each to determine the replacement cost of your property can lead to inaccurate estimates and inadequate coverage limits.
Other Considerations
Purchase Adequate Coverage
We always recommend purchasing coverage at least equal to the estimated cost of rebuilding your home. Anything less than that is considered underinsured and can open you up to significant risk in the event of a loss.
How do I Know Replacement Cost?
Though you can get an estimate of the replacement cost of your home from a reputable builder, our recommendation is to have our team help with an assessment. We have multiple tools and policy endorsements available to ensure your home is insured with proper limits if something happens.
Inflation Guard
Most companies will typically include an inflation guard to increase the home’s replacement cost around 3%-6% annually. This is to ensure your limits keep up with inflation and the rising costs of labor and materials. Though this is a good way to ensure annual adjustments are made, it’s still important to review this amount annually to ensure it’s still sufficient.
Home Improvements
When making a major change, it’s important to inform your agent so your policy limits can be adjusted accordingly. For example, if you’re replacing a standard bathtub with a whirlpool tub, or if your new countertops are made of marble, your home improvements could add enough value to your home to justify reexamining your coverage limits to ensure they’re adequate.
We’re Here to Help
Have other questions or doubts? Our team is ready to assist you in the process of determining the value of your home and purchasing the right coverage to protect your investment. Contact us today for a complimentary review of your insurance program.
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Sourced in Part From: Zywave