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Home Insurance and Replacement Cost

Your guide to understanding what replacement cost is

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Written by Joel Kranc

What is replacement cost?

Replacement cost insurance pays you the full replacement cost of an item you are making a claim on. Actual cash value differs in that it only pays for the depreciated value of the item.

When it comes to insuring your home, it’s important to know how replacement cost differs from market value. The market value of your home is the price you would if you were to sell it on the open market, including the land value. Replacement costs cover the cost to rebuild the house but does not include the land value.

Guaranteed replacement cost

Guaranteed replacement cost allows you to rebuild or replace your property without depreciation, even if the damage exceeds your policy’s limits.

It’s important to keep your home valuations up to date and inform your insurer of any improvements that materially change the risk accepted by the insurer.

Guaranteed replacement cost usually refers to the costs of rebuilding the home or dwelling whereas full replacement usually refers to personal property.

How you can determine replacement cost

There are a number of ways you can determine replacement costs. For example:

  • Insurance company: Your insurer will calculate your replacement value based on the information they have.
  • Hire an appraiser: You can hire an appraiser to assess the value of your property.
  • Do it yourself: Use the common factors used to calculate your house replacement value by using a cost estimator.
  • Online replacement cost calculator: Use one of the many cost calculators online that you can use to estimate the value.

To calculate the replacement cost, first, determine the building cost per square foot in your area and then multiply that by your home’s square footage.

Ensure that the costs you are using for materials are the same or similar to the ones that were damaged. The costs are also tied to the amount of coverage you selected and the amount your insurance company will pay you if you file a claim. Some insurers offer extended coverage, which can provide between 125% to 150% of the home’s replacement costs.

Factors that affect replacement cost

Replacement cost generally refers to how much it would cost to rebuild your house from the ground up in the event of a total loss. Of course, each house is different, materials costs are never static and geography may also determine cost. Consider the costs that go into:

  • Age
  • Building codes
  • Location
  • Roofing materials
  • Type of flooring
  • Exterior and interior features
  • Foundation and footing
  • Plumbing and electrical fixtures
  • Wiring
  • Pipe systems
  • Heating and colling system
  • Interior finishes (walls doors cabinetry, etc..)

Frequently asked questions about replacement cost

Is dwelling coverage in home insurance the same as replacement cost?

No. Dwelling coverage helps pay to rebuild or repair your home’s structure if it’s damaged by fire or other natural disaster. It only covers the structure and not its content.

Why is replacement cost different than what I paid to build or buy my house?

Market values may have changed since then and you may have upgraded or changed portions of your house from the time you purchased it. Also, the market value may have changed based on supply and demand in the market, and local assessments by your local tax authority may have reassessed the value of the property since the time of purchase.

How do insurance companies determine the replacement value of my home?

Insurance providers look at items such as year of construction, location, improvements, foundation, roof type, home design and square footage.

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