How to Calculate the Replacement Cost Insurance Needed for Your Home?

How to Calculate the Replacement Cost Insurance Needed for Your Home?

Before you commit to a home insurance plan, you should be aware of your home replacement cost if it were to be destroyed in a disaster. This number can be confusing to people who haven’t thought about how property values and building costs change. Here are important points to know about home replacement costs.

What is replacement cost?

Insurance agencies define home replacement cost as the cost required to rebuild a home using similar materials. This replacement cost is affected by market prices for materials and the amount of coverage you choose. You set a coverage amount that pays to rebuild your home at current prices through a dwelling coverage plan.

Consider an extended replacement cost policy, which can pay up to 150 percent of the home’s replacement cost. This plan fights inflation, whereas a standard plan doesn’t account for rising costs. Another option to consider is guaranteed cost insurance, which covers the total rebuilding costs, even if they surpass dwelling coverage limits.

Replacement cost/ value of your home vs. its actual cash value

It’s best to know your home’s replacement cost then find the insurance coverage that will provide this amount. If you base your insurance on actual cash value, it translates into less repair work for higher costs. Here’s how replacement cost compares with actual cash value cost.

Actual cash value (ACV)

Depreciation value is included in an actual cash value policy. By subtracting a certain percentage of value each year of a product’s lifespan, you can estimate depreciation. The older the home, the more the materials depreciate, although the overall property value might be rising. That means the more a roof uses up its lifespan, the more you’ll end up paying to replace it out of your pocket.

Benefits of Replacement cost

The advantage of basing coverage on replacement cost is that it doesn’t take depreciation into account. That means the amount of your payout will reflect the costs to restore your home to its state before the damage occurs. To be safe, you should insure your home at least 80 percent of the replacement cost. Otherwise, the insurer may not cover the entire cost in a claim.

Replacement cost value of your home vs. its market value

Market value reflects what your home would be worth if you put it on the real estate market. This value is based on multiple economic factors and is usually much higher than what replacement costs reflect. You don’t want to base your home insurance coverage on market value because it could mean overpaying for insurance.

Factors that can impact replacement cost insurance

  • Age – Older homes with unique hard-to-replicate features may require higher coverage limits and premiums.
  • Building Codes – Local governments change these codes over time to reflect more safe and modern innovations. If your home is destroyed, rebuilding costs consider what the current building codes require.

Home replacement cost estimator

Find out from a local builder what your neighborhood’s building cost is per square foot. Then multiple this value by your home’s square footage. The result will help you estimate your replacement cost.

Accurately determining the replacement cost value for home insurance

It’s better to focus on replacement cost coverage because it will likely provide more value than ACV. Contact us at 01 Insurance for more information on factors that affect your overall insurance costs.