Market value? Replacement cost?
Terms like these are important when it comes to choosing how much insurance you need to protect your home, but they’re often misunderstood and conflated.
While an insurance agent can figure out how much coverage is enough, it doesn’t hurt for you to understand just how they got to this target number. To do this means understanding the terms market value and replacement cost.
How Much Homeowners Coverage Do You Need?
Before delving into what the terms market value and replacement cost mean, let’s discuss how an insurance agent can help you come up with the ideal amount of Coverage A for your insurance policy.
Coverage A is a type of insurance coverage that pays out on covered events (like fires, for example) to repair damage to the structure of your home. This includes the foundation of your home, the walls, floors, roof, and any other permanent installations (like cabinets, for example). If you have any additional structures connected to your home’s permanent foundation (like a breakfast room or an attached garage, for example), they are covered under Coverage A as well.
Your insurance agent wants you to have the maximum amount of Coverage A that you’ll need in the event of a covered disaster that damages your home. It’s easy to imagine how frustrating it would be to receive only a partial payout for damage to your home. You want to know that you’re covered completely if a disaster occurs.
To figure out the correct amount of coverage, you agent will ask a number of questions about your house and plug them into what’s called a Replacement Cost Estimator. This calculator adjusts for all the costs that would go into replacing your home’s structure were it to be destroyed by a covered event.
This includes the estimated costs to replace your home’s:
- Exterior and interior walls
- Interior structures that are permanent (all non-permanent and moveable structures will be taken care of in a different part of your homeowner’s insurance policy)
Once all of these costs are calculated, your insurance agent will have what’s called your home’s replacement cost. This is the valuation that you’ll need to carry for Coverage A on your home. Remember that you’ll also need to consider several other factors when choosing Coverage A, including:
- Mortgage lender requirements on your homeowner’s insurance
- Whether you’d like to add an Inflation Guard endorsement or an Extended Replacement Cost endorsement
- Co-insurance considerations in the event of a partial loss claim (ask your agent to learn more as understanding this concept can be challenging)
What About Market Value
You now know what replacement cost is, but what about market value?
Market value is often conflated with replacement cost, but the two are quite different. Market value looks at the value of your home in the event of its sale. Let’s say you put your home on the market as it is right now. How much could you get for it in a fair sale with a willing buyer (and as a willing seller yourself)? This is the market value of your home.
Let Us Help You Choose the Ideal Home Insurance Amount
Deciding how much to insure your home for presents several challenges that you may not have anticipated. As you can see, it’s not as simple as looking at your home’s actual market value. Instead, a multitude of factors must be considered in order to come up with an accurate replacement cost.
The best way to encompass every important aspect and to come up with a safe and protective amount to insure your home is to speak with an insurance agent.
At Andreotti Agency, we can help you do just that. Call us today!