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Written by Kayla Jane Barrie Updated on Mar 03, 2025 6 mins read

Blog How To Determine Home Replacement Costs For Insurance

Why is replacement value important for insurance?

Home replacement cost is one of the most important factors to consider when you get home insurance. Having enough coverage will put your mind at rest knowing you’ll receive enough funds to rebuild your home after a sudden accident.

With property values rising across the country, it’s essential to think about replacement costs. The amount in your policy will significantly matter if your house 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 you need to know about replacement cost and insurance:

  • Home replacement cost, used to calculate rebuilding costs after damage, considers factors like location and weather risk to determine appropriate coverage.
  • Most policies require at least 80% of the rebuilding cost; adjust this amount as needed, consulting your insurer to ensure adequate coverage.
  • Replacement cost coverage repairs or replaces damaged items with new, like-kind items; guaranteed replacement cost covers the full rebuilding amount, regardless of policy limits; location influences costs.

What is home replacement cost?

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 it's been 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. Renos can increase your replacement cost and monthly/yearly payments. An example of this would be if you were to add a swimming pool, which requires additional coverage.

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

How do I know if the replacement cost is covered in my policy?

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. Set the amount at a number you are financially comfortable with.

Let's use an example to illustrate this point. Let’s say you have a $300,000 replacement cost. In this instance, the insured-to-value threshold is 80% of $300,000, or $240,000. This is your coverage limit. 80% is a standard number in most policies.

You have a house fire. Your total claim for repairing the damage is $50,000. With an 80% replacement value, your insurer would pay the full amount up to your coverage limit - $50,000 in this case.

But, if you have a replacement value lower than 80%, most insurers will only pay a percentage of the damage. It would be the same replacement cost value percentage. So, if you have 75% replacement value, they would cover 75% of the claims costs.

Dwelling coverage % of RCV* Claim payout
$300,000 80% $50,000
$300,000 75% $37,500
$300,000 60% $30,000

*replacement cost value

What is guaranteed replacement cost?

Guaranteed replacement cost provides additional protection above the 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.

For example, your home is insured at a guaranteed replacement cost of $300,000. Your home is significantly damaged in a storm. After evaluating the damage, it will cost $350,000 to replace. If you have a guaranteed replacement cost, the additional $50,000 will be covered.

Paying a little more for guaranteed replacement costs gives you peace of mind in knowing your home will be repaired, even if the costs exceed your coverage limit.

This is important because as property values increase, it becomes more difficult to estimate the costs accurately. Home improvements around your property only make it more complex. You may also need to consider insurance endorsements to customize your needs.

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. Depending on where you live, you may also need higher or lower costs. If you live in the city, you may want to speak with a Toronto broker to confirm the costs associated with replacement.

Factors that affect the replacement cost of your home

Various factors can impact reimbursement and rebuilding costs for your home. 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 play a role in how much it will cost to replace.
  • Furniture and valuables: Create a home inventory list to keep track of belongings and ensure you have additional protection for values such as jewellery insurance.
  • 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.

Tips for calculating the replacement cost

Calculating replacement costs is important to understand the true value. There are four main ways to calculate the value of your home if you need to replace it:

  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.

Protect your home and save

Use Thinkinsure to shop around and compare multiple homeowners insurance quotes. Find the best coverage to protect your financial wellbeing.

White brick house with black trim

How to determine the replacement cost of your home

Here are five 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 the 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.

After you assess these considerations, speak to a ThinkInsure representative to update your policy.

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.

  • ACV: Costs less upfront, but you will need to pay more to rebuild your home if it is destroyed or damaged.
  • Replacement cost: Costs more money, but you are reassured that you will be fully reimbursed for damages, up to your policy limits.

For example, using actual cash value, the 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 to use 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 home replacement cost?

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 of rebuilding.


Home replacement costs FAQs

Replacement coverage will cover the cost of restoring items or replacing them with items of the same quality as 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.

Replacement costs won’t go up and down with the real estate market, but they can change depending on the costs associated with labour and materials becoming more expensive. This is also why it’s important to have proper insurance during a renovation, as it could impact the cost to rebuild your home.

Never guess your home replacement cost

Home replacement costs should not be taken lightly or simply estimated. Take time to evaluate your home and belongings. Speak with the experts at ThinkInsure to answer any of your questions and to ensure your home insurance in Ontario meets your home value.

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