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Replacement Cost Coverage

Understanding Replacement Cost coverage for your home.

Most American's single largest asset tends to be their house and because of this, insuring it properly is a must. Several factors must be reviewed when coming up with a proper home value for insurance.

First, a discussion between an insurance agent and customer must take place to understand expectations, and plans, if a devastating loss were to occur. A determination whether or not the customer would rebuild their home on their land or move and sell their land needs to be discussed because this will impact the type of coverage needed.

Replacement cost typically is the best option for homeowners. Most homeowners would rebuild their home on their lot if they suffer a catastrophic loss such as a fire, and expect to rebuild the same size and quality of house they had prior to the loss. This, in a nutshell, is the basic definition of replacement cost. (If you don't rebuild on the same premises, the company will not pay to replace the house and thus replacement cost is not for you).

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When calculating the value of a home using the replacement cost method, the following need to be considered:

  • The construction quality of the house.
  • Distinct features in the house (porches, decks, patios, basement, air conditioning, skylights, kitchen, bedrooms, bathrooms, etc.)
  • The square footage of the house.
  • The year the house was built.
  • The area of the country/state/county where the house is located.

Most local insurance agents will help their customers come up with a general estimate based on fact finding conversations with the client and entering this information into an insurance company formula. The formulas the insurance companies use will help generate an acceptable replacement cost. Furthermore, some insurance companies will come out and do an inspection of the property to ensure the proper limit is selected.

Many individuals deem these estimates of a home's replacement cost to be more than their house is "worth" and don't fully grasp the concept of replacement cost because more often than not, they're thinking more in line with market value.

Market value seems to be what customers gravitate towards and thus in many instances think their home is over valued and hence over insured. Market value only takes into consideration the value of other comparable houses in the area, the selling price for these homes and what a particular house would possibly sell for. Here's the problem, if a particular house is located in a depressed neighborhood of the city, the market value may only be worth for example $50,000. If the same exact house were to be located in an upscale area of this same city, the house might have a market value worth $200,000. More importantly, the cost to rebuild this house in each spot would be the same due to similar construction materials, similar labor costs and therefore the house needs to be insured using the same replacement cost determined using the steps previously mentioned.

Now, if the home is located in a depressed area and the owner would like to insure it for a lesser value because they wouldn't rebuild on the same property and therefore aren't concerned with the replacement of the house, there are other options such as a market value policy, actual cash value policies or a purchase price plus improvements value policies. You should speak with your agent, or insurance company, to determine which amount is best for your situation.

Lastly, once a reasonable amount of coverage is determined, the policy should be reviewed at least every 2-3 years for accuracy to ensure proper coverage will exist at the time of a claim.

The time to find out if you are properly insured is when there isn't a problem. Compare your home insurance rates today and speak with your insurance agent to be sure you have the coverage you need and expect.