Blog How To Calculate House Insurance Replacement Costs

Sep 21, 2017

How Much Home Replacement Insurance Should You Have?

Roof on a brown house damaged

Home replacement cost is one of the most important factors to consider with home insurance. While it’s not something you want to think about, it will significantly matter if your home is severely damaged or destroyed.

Below we will define replacement cost, explain how it works and how to easily use a cost calculator to determine how much of a limit you need.

What Is House Insurance Replacement Cost?

Home replacement cost, or replacement value, is the amount of money it would cost to replace it from the ground up. It is used to calculate the cost to rebuild your home if it were 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 flooding, you'll want to have extra protection.

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

What Is The Difference Between Market Value And Replacement Cost?

Homeowners often mistake current market value and replacement costs - not what it 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.

Factors That Affect Replacement Cost Of Your Home

Factors than can impact reimbursement and rebuilding costs include:

  • Age of your home : Older homes may have certain features that are more difficult to repair or replace. For example, custom crown molding
  • Materials : The material used in construction will impact costs to replace.
  • Building codes : Updated building codes require your home to meet certain safety thresholds. If you have an older house or heritage home, you will need to ensure it meets current building codes.

What Are My Replacement Cost Insurance Options?

Interior of house frame being reconstructed

You have a number of options when considering home replacement value coverage. The option you choose impacts how you calculate replacement costs. Options include:

  • Full replacement value
  • Guaranteed replacement value
  • Actual cash value

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 damage is higher 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 accurately estimate the costs. 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 are 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.

What Is The Difference Between Actual Cash Value And Replacement Cost?

Inside of house with flooding

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 of comparable features.

If you are not sure which method is used to calculate replacement costs, contact your advisor for more information. If you have ACV, you can increase your plan to include full protection.

Estimate Value With A Home Replacement Cost Calculator In Canada

Calculating home replacement costs is important to understand your home’s 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 about your home.
  2. Hire an appraiser : You can hire an appraiser to accurately assess your home.
  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 a number of cost calculators online that you can use to estimate the value.

Factors Used To Calculate House Insurance Replacement Cost

Here are the main factors used to calculate the costs:

  • Personal belongings : Keep a home inventory of personal items.
  • Exterior home features : Get an estimate for new siding, brick, and windows.
  • Roof installation : Contact a local roofer to get an estimate.
  • Flooring: Get an estimate from a local flooring company.
  • Fixtures, cabinets, and appliances : Compare the costs of your fixtures, cabinets and appliances with the cost of similar new items in the store.

Insurers determine the amount by tallying how much it would cost to replace the above. Others factors that could impact it include :

  • Age of home
  • Custom features
  • Square footage
  • Foundation type
  • Materials used
  • Number of bathrooms
  • Finished basement percentage
  • Quality of finishes used
  • Garage

Tips For Calculating Replacement Cost

House with fallen tree on it

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

A home renovation can impact building costs. Notify your provider each time make any upgrades. They will use this information to update your home replacement value to ensure it’s accurate. Failure to notify your insurer after a renovation could negatively impact your payout after a claim.

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.

Is Your Replacement Value Up To Date?

Not sure if your home value is up to date? Want to calculate the value? Contact our advisors today to get a find a plan that meets your needs.

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