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- What is home replacement cost?
- Does my home insurance policy cover replacement cost?
- Replacement cost vs. guaranteed replacement cost vs. actual cash value
- How do insurers calculate home replacement cost?
- How to calculate your home replacement cost yourself
- Frequently asked questions about home replacement cost
Content Writer
What is home replacement cost?
Replacement cost – or ‘replacement value’ – is the amount of money an insurance company pays to rebuild a home from the ground up in the event it’s destroyed by fire, flood, severe weather event or another covered peril. This includes the cost of replacing the contents of your home, such as furniture, clothing and electronics.
This amount is supposed to reflect how much your home would cost to replace today, not the amount you bought it for or can sell it for, or how much it cost to build originally. It also doesn’t incorporate depreciation to account for the fact that new materials will be used in the rebuilding process.
Note that significant renovations – such as installing a swimming pool – could hike up your replacement cost due to requiring additional coverage. So, whenever you renovate anything, be sure to notify your insurer.
Replacement cost usually applies to the following aspects of your property:
- Dwelling: This is the structure in which you reside, including all of its fixtures – the home itself.
- Detached structures: This is any structure on your property that isn’t attached to the home (i.e. the dwelling), such as a gazebo, guesthouse or garage (detached garage, specifically).
- Personal belongings: This is anything on your property that isn’t part of the main structure(s), such as furniture, electronics and clothing.
Does my home insurance policy cover replacement cost?
Your policy should cover your home replacement cost to some extent. In fact, most policies typically cover at least 80% of the replacement cost by default.
Before signing an agreement with your insurance provider, however, make sure you know what your replacement cost is. You can set it to your preferred amount yourself (within reason). Just remember that higher coverage equals higher premiums, whole coverage puts you at risk of having to pay for everything out of pocket.
What does 80% coverage even mean?
It means exactly what it sounds like – that the policy covers only 80% of your full replacement cost. For instance, if the cost to rebuild your home from the ground up is $350,000, then the insurer would pay $280,000 to replace it – in the scenario that it gets completely obliterated.
However, if a disaster, such as fire, ruins only a piece of your home, requiring $40,000 to replace what’s been lost, then your 80% replacement cost would cover the full amount, since it falls within the $280,000 limit.
You can also opt for coverage below 80%. In this case, only a percentage of the full amount would be covered – no matter how much damage was done to your property.
For example, in this same scenario, your 75% coverage limit would be $262,500. If your home gets partially damaged, requiring $40,000 to replace what’s been lost, your insurer would only cover 75% of that cost – meaning $30,000 – leaving the remaining 25%, or $10,000, to you.
That’s why most insurers cover at least 80% by default, to avoid sticky situations like the one outlined above – unless the policyholder explicitly opts into it.
Replacement cost vs. guaranteed replacement cost vs. actual cash value
Replacement cost isn’t the only coverage that could reimburse you for your home in the event of a total loss. There are two alternatives: ‘guaranteed replacement cost’ and ‘actual cash value.’
Here’s how they differ:
Actual cash value (ATV) | Replacement cost | Guaranteed replacement cost | |
|---|---|---|---|
What it covers | Covers the cost of replacing your home and the items inside AS THEY ARE, up to a certain amount, accounting for depreciation. | Covers the cost of replacing your home and the items inside as though they were new, without factoring in depreciation. Coverage is up to a certain amount. | Covers the full cost of replacing your home and the items inside as though they were new, without factoring in depreciation or imposing any limits. |
Coverage limits explained | The up-to-date value of your home (from rebuilding perspective) will always be lower than its full replacement cost, because old/depreciated materials cost less than new materials. | The estimated full cost of your home is the limit of your coverage. If your home costs more to replace than the estimate, your payout will not be adjusted to match this reality. | There is no limit to this coverage. Regardless of what your replacement cost ends up being, your insurance company will cover it. |
Coverage limit examples | If your ATV is $200,000, but your full replacement cost is $300,000, in the event of a total loss, you’d have to cover the $100,000 gap yourself. | If your home replacement cost is estimated to be $300,000, but the actual amount turns out to be $350,000, in the event of a total loss, you’d have to cover the $50,000 gap yourself. | Whether your home replacement cost ends up being $300,000, $350,000 or more in the event of a total loss, your insurance company will cover the amount in full, no matter what. There should be no out-of-pocket expenses. |
Cost (relative to each other) | Low | Medium | High |
How do insurers calculate home replacement cost?
When calculating the replacement cost of your home, insurers try to account for as many factors as possible. The factors they usually look at include:
- Square footage and height: Wide and tall homes cost more insure than narrow and short homes due to requiring more labour and building materials. Bigger homes also tend to have more items in them.
- Foundation type and overall design: A home situated on a slab will cost less to rebuild than a home with a basement due to requiring fewer considerations. In addition, a home with unconventional architecture could cost more due to requiring more labour and uncommon materials.
- Construction materials: If your home consists of higher-quality and/or rare building materials, it will cost more to insure than a home built of lower-quality, more common materials. This includes flooring, fixtures and roofing materials.
- Location: The location of your home can impact the cost of both labour and materials. Building codes in your area can also affect the replacement cost, since certain requirements may require more labour and/or additional materials.
- Age: More specifically, the age of your home. The older it is, the likelier it is to have a structure and/or materials that don’t conform to modern standards. This includes plumbing and electrical systems. Because of that, the cost of labor and materials is likely to be higher.
- Personal property: The quantity and cost of the personal possessions located on your property – such as electronics, furniture and clothing – plays a big role in your replacement cost. As expected, the pricier and more expensive the items are, the higher the replacement cost.
How to calculate your home replacement cost
There are three ways to find out your home replacement cost. You can:
- Get your insurer to do it: Talk to your insurance provider to get them to calculate your replacement cost for you.
- Get an appraiser to do it: If you don’t trust your insurance provider on t, you can hire an appraiser who would provide you with your home replacement cost. You might also want to compare this to your insurer’s estimate to see if there are any discrepancies.
- Do the calculations yourself: You can always calculate your replacement cost yourself, using the aforementioned factors, such as square footage, location, age, materials and so on. This would require you to know the cost of the necessary labour and materials. We don’t recommend this method, since you’re far more likely to make a poor estimate than an expert.
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Frequently asked questions about home replacement cost
Got more questions about home replacement cost? We got you covered.
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.
Is the market value of my home the same as home replacement cost?
No. The value of your home on the real estate market does not coincide with its replacement cost.
The most important difference between the two is that the market value includes the value of the land itself, not just the buildings. Land value is determined by factors that extend beyond the land itself, such as local climate, neighbourhood quality and proximity to other locations (like stores, schools and access to public transit).
For instance, it may cost to replace your home brick by brick $300,000. But because it’s located in an in-demand area such as downtown Toronto, the property itself might be worth $1,000,000-$2,000,000. So, while you can sell that home for close to $2,000,000, you’d only need to spend $300,000 to rebuild it from the ground up.
Can my replacement cost change over time?
Yes, but not in the way that you may think. Many wrongly assume that the replacement cost of their home goes up and down alongside its real estate market value, but that’s not really how that works.
Usually, material and labour costs are the two main factors that change over time. The higher those amounts are, the higher the replacement cost, and vice versa.
Can I use my replacement cost coverage to buy a new home and move?
No, this is not something most insurers would allow. The idea behind the replacement cost reimbursement is to pay for rebuilding and repairing the home you already own.
Given that home replacement cost rarely coincides with home market value, you might be better off rebuilding your home using the insurance money and then selling it, since your replacement cost might be lower than the market value of your home.
Does my replacement cost impact my home insurance premium?
Yes. The more your home costs to rebuild from the ground up, the higher your insurance premium will be. You can always opt for less coverage to lower your premium. For instance, you can have your insurance cover only 70% of the total replacement cost. The risk here is that it could result in higher out-of-pocket expenses should the worst happen.
Can renovations affect my home replacement cost?
Absolutely. Depending on the extent of the renovations and materials used, your replacement cost could end up either higher or lower. If you do end up doing renovations, be sure to let your insurance company know, so they can reappraise your home and let you know your new replacement cost.
Taras Trofimov, Content Writer
Taras has over nine years of content marketing experience across multiple industries in B2B and B2C spaces. He has produced thought leadership content for organizations like Constellation Software, Facebook and Yellow Pages as well as outlets like Huffington Post and MSN Canada.
He graduated from York University with a Bachelor of Arts degree and studied Technical Communication at Seneca College.
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