Blog How To Determine Home Replacement Costs For Insurance

Oct 20, 2021

How Much Insurance Should You Have For Home Replacement?

Interior of house being repaired

Home replacement cost is one of the most important factors to consider with your home insurance quote.

With property values rising across the country, it’s essential to think about as it will significantly matter if it is severely damaged or destroyed from a natural event such as flooding, or a fireplace accident.

Whether you are buying a new house, or looking to understand the replacement cost of your current home, we explain how it works and how to easily use a cost calculator to determine how much of a limit you need.

What Is Home Replacement Cost For Insurance?

Home replacement cost, or replacement value, is the amount of money it will cost to replace it from the ground up. It is used to calculate the cost of rebuilding your house if devastated by fire, weather events, or other perils. When choosing what to add to your plan, consider where you live - if you're in an area prone to extreme weather, you'll want to have extra protection.

It's also important to consider if you are doing any home renovations, to let your insurer know. If there are any accidents or liabilities, you want to make sure your home value is updated.

Many policies break down your coverage into dwelling, detached structures (if applicable), and personal property.

Factors That Affect Replacement Cost Of Your Home

There are various factors that can impact the reimbursement and rebuilding costs. Some include:

  • Age : Older households may have certain features that are more difficult to repair or replace.
  • Materials : The custom features and quality of finishes of the material used in construction will impact costs. Fixtures, cabinets, flooring, and appliances are aspects to consider.
  • Size : The square footage and size plays a role how much it will cost to replace.
  • Furniture and valuables : Create a home inventory list to keep track of belongings.
  • Building codes : Updated building codes require your household to meet certain safety thresholds. If you have an older house or heritage home, you will need to ensure it meets current building codes.

Actual Cash Value Vs. Replacement Cost

Actual cash value (ACV) takes depreciation into account when calculating a home insurance claim. Replacement cost does not take depreciation into account. How much you are compensated can vary significantly based on which payout calculation is used.

For example, using actual cash value, your 3-year-old television you purchased for $1500 may only be valued at $500 today. Using replacement cost, your television would be replaced with a new TV with comparable features.

If you are unsure which method is used to calculate replacement costs, contact your insurer for more information. If you have ACV, you can increase your plan to include full protection.

What Is The Difference Between Market Value And Replacement Cost?

man looking at construction designs

Homeowners often mistake current market value and replacement costs - not what they can get on the real estate market. Market value also includes the land, while replacement cost does not. For example, you may be able to sell it for $500,000, but it may only cost $250,000 to rebuild. You are only covered for the cost to rebuild.

What Is Guaranteed Replacement Cost?

Guaranteed replacement cost provides additional protection above replacement value. It will pay for the replacement of your home without depreciation factored in. Even if the damage is more serious than your value limit, your insurer will fully replace your property and possessions.

This is important because as property values increase, it becomes more difficult to estimate the costs accurately. Renovations and home improvements only make it more complex.

Guaranteed Replacement vs. Full Replacement

Guaranteed replacement cost is commonly associated with the cost of the dwelling, and replacement value is commonly referred to when talking about personal property.

Replacement cost means damaged items and parts of your home will be repaired, if possible, or replaced with a new item of the same quality without depreciation. Guaranteed replacement cost means your home is covered for the full amount to replace your dwelling, even if it exceeds the replacement limits.

Tips For Calculating Replacement Cost

Calculating replacement costs is important to understand the true value. There are three main ways to calculate the value :

  1. Insurance company : Your insurer will calculate your replacement value based on the information they have.
  2. Hire an appraiser : You can hire an appraiser to accurately assess your property.
  3. Do it yourself : Use the common factors used to calculate your house replacement value by using a cost estimator.
  4. Online replacement cost calculator : There are several cost calculators online that you can use to estimate the value.

Here are tips to calculate replacement costs and ensure you have adequate protection :

  • Maintain your belongings : Keeping a detailed home inventory ensures you have accurate records and it simplifies the claims process.
  • Factor in renovations : Factor in all work you do to upgrade your home.
  • Don’t cut costs : Replacement value is not an area to mess with when trying to reduce your yearly costs.
  • Consider getting an appraisal : When was the last time you got an estimate for your home?
  • Assess home value upon renewal : Renewal is an ideal time to reassess your needs and ensure the value is accurate.

Home Replacement Costs FAQs

Having replacement coverage will cover the cost of restoring items or replacing them to the quality of the ones lost. The better home insurance you have, the better you will be protected and reimbursed in the event of a claim. It's always worth considering additional options like overland water insurance or sewer backup insurance.

Most insurers will not allow you to move from your current dwelling. The purpose of this reimbursement is to rebuild and repair what you already have, not to relocate and buy a new home.

Yes, your replacement value, as well as the type of policy, will impact the cost of your monthly and annual payments.

A lower replacement value and lower levels of protection will reduce your costs. But it could also leave you exposed. You may also not have access to full benefits to cover accommodations while your home is being repaired or rebuilt.

Most policies require you to have at least 80% of your rebuilding cost included in your agreement. This amount could be increased or decreased, but always speak with your insurer to confirm what is covered.