Blog Post: 1
Replacement Cost vs. Market Value
“Why do I have that amount of coverage on my house when I paid “X”?”
Andy Noel | January 2, 2019
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As an Insurance Agent, the most commonly asked question I get in regards to a Homeowners policy is: “Why do I have that amount of coverage on my house when I paid “X”?” This is a great question because it is rarely explained to the client. The answer is simple, when purchasing a home, the buyer (client) is only worried about the Market Value of the home. But when it comes to insuring the home it is important to insure it to 100% of the Replacement cost.
To help simplify this, let’s take a look at each individually.
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Market Value – The value of the property a buyer could expect to pay in the current real estate market. When determining Market Value, a lot of different factors are taken into consideration. A few of them are: Size of the property (both land size and square footage in the dwelling), number of bedrooms and bathrooms, additional structures on the property (Garages, pole barns, sheds, etc.), and location of the property.
Replacement Cost – The cost to rebuild the structure at the current location using materials that are similar to the original structure. This estimate takes into consideration the current rate of materials and the cost of labor in the current market. This includes the Dwelling and all attached items to the structure (cabinets and counter tops). Additional structures on the property and property items not attached the the structure are covered on different sections of the Homeowners Policy. These sections are: Coverage B – Additional Structures and Coverage C – Personal Property.
To help understand the difference between the two, let’s look at a 1500 sq. ft home with 3 bedrooms and 2 bathrooms. Most likely this property would cost significantly more if it were lakeside vs being located in a rural neighborhood. Although, the Market Value of the home is significantly different, the Replacement Cost of the property at either location would be similar.
Insurance agents use a software called a Replacement Cost Estimator to help determine the proper amount of coverage needed for each client. Most insurance companies use their own estimator which means the amount might differ from carrier to carrier.
Therefore, it is important to reach out to your local agent, or any of us at Huston Insurance in Findlay, Ohio to determine the value that best fits your Homeowner Insurance needs.
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