How To Calculate House Insurance Replacement Costs

Sep 21, 2017

Home Insurance Replacement Cost

Home replacement cost is one of the most important numbers in your home insurance policy. While it’s not something you want to think about, replacement value of your home matters significantly if your home is severely damaged or destroyed.

An insurance replacement value calculator is used to determine replacement costs. Below we will define replacement cost, explain how replacement cost coverage works, explain how to use a replacement cost calculator, and answer common questions about home replacement value.


What Is House Insurance Replacement Cost?

Home replacement cost, or replacement value, is the amount of money it would cost to replace your home from the ground up. Replacement value is used to calculate the cost to rebuild your home if it were devastated by fire, weather events or other perils. Choose replacement cost coverage that makes most sense for your home and situation.

The amount of insurance for replacement is listed in your home insurance policy. 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. Replacement cost is not what your home can get on the real estate market. Market value also includes the land. Replacement cost does not. For example, you may be able to sell your home for $500,000, but it may only cost $250,000 to rebuild. You are covered for the cost to rebuild.


Factors That Affect Replacement Cost Of Your Home

Factors than can impact replacement 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 to construct your home will impact replacement value and costs to replace.
  • Building codes : Updated building codes require your home to meet certain safety thresholds. If you have an older home, you will need to ensure it meets current building codes.

What Are My Replacement Cost Insurance Options?

House Replacement Value For Insurance

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. Guaranteed replacement coverage pays for the replacement of your home without depreciation factored in. Even if damage is higher than your replacement value limit, your insurer will fully replace your property and possessions.

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

The Insurance Bureau of Canada provides more details about guaranteed replacement cost homeowner’s insurance:

“Guaranteed replacement cost coverage permits you to rebuild or replace your property, even if the damage exceeds your policy’s limits. This is why it’s important that your home’s insurance value is current and correct. Some replacement cost coverage has a ‘same site’ requirement. This means the coverage only applies to rebuilding at the same location. If the cost of rebuilding your home has increased in recent years, talk to your insurance representative about getting your home insurance valuation updated.”

Guaranteed Replacement Cost vs. Full Replacement Cost

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 cost to replace your dwelling, even if it exceeds the replacement cost limit in your policy.

Therefore guaranteed replacement cost is commonly associated with the cost of the dwelling, and replacement costs are commonly referred to when talking about personal property.


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

Calculate Home Replacement Cost

Actual cash value (ACV) takes depreciation into account when calculating a home insurance claim payout. Replacement cost does not take depreciation into account. How much you are compensated can vary significantly based on which insurance 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 insurance broker for more information. If you have ACV, you can increase your policy to include full replacement cost.


Estimate Value With A Home Replacement Cost Calculator In Canada

Calculating home replacement costs is important to understand your home’s true replacement value. There are three main ways to calculate home replacement value :

  1. Insurance company : Your insurance provider 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 replacement cost.
  3. Do it yourself : Use the common factors used to calculate your house replacement value. This method is a free replacement cost estimator for home insurance.
  4. Online replacement cost calculator : There are a number of replacement value cost calculators online that you can use to estimate replacement value.


Factors Used To Calculate House Insurance Replacement Cost

Here are the main factors used to calculate homeowner’s insurance replacement costs:

  • Personal belongings : Keep a home inventory of personal items.
  • Exterior home features : Get an estimate for new siding, brick, and windows.
  • Roof replacement costs : Contact a local roofer to get a replacement 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.

How do insurance companies determine home replacement value? They tally how much it would cost to replace the above.

Others factors that could impact replacement costs 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

Estimate Home Value For Insurance

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

  • Maintain your home inventory : 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 insurance premiums.
  • Consider getting an appraisal : When was the last time you got an estimate for replacement costs?
  • Assess home value upon renewal : Policy renewal is an ideal time to reassess your home insurance coverage and ensure your replacement value is accurate.


Do Home Renovations Impact Replacement Value?

A home renovation can impact building replacement costs for insurance. Notify your insurance broker each time you upgrade your home. They will use this information to update your home replacement value to ensure it’s accurate.

Failure to notify your insurance company after a renovation could negatively impact your insurance payout after a replacement cost claim.


Can I Use House Insurance Replacement Cost Money And Move?

Most insurance companies will not allow you to move from your current dwelling. The purpose of replacement costs is to rebuild and repair what you already have, not to buy a new home.


Does Replacement Cost Impact Insurance Premiums?

Yes, your replacement cost value as well as the type of replacement cost coverage you have in your policy (ACV, full replacement, guaranteed replacement) will impact the cost of your insurance premiums.

A lower replacement value and lower levels of coverage will reduce your home insurance rates. 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/rebuilt.

Is Your Replacement Value Up To Date? Contact A ThinkInsure Broker To Find Out

Not sure if your home replacement value is up to date? Want to calculate your home replacement value? Contact our home insurance brokers today to review your home insurance policy.


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