What Homeowners Need to Know about Replacement Cost and Market Value

March 16, 2015

Recent research shows that most homeowners do not have sufficient coverage to provide for all of their belongings. According to the survey, more than 65 percent of American homeowners were under-insured by about 20 percent.

Replacement Cost And Market Value
The cost to rebuild a home is much different than the market value of what a home would sell for. With market value, the land value, market factors and depreciation costs are all counted. However, replacement cost is simply the amount needed to rebuild the home, which can be a varying number. Two homes of identical construction on the same lot size could be worth very different amounts if they are in different areas of a city. Rebuilding costs can be lower or higher than property values, and this is because the cost of construction is about the same regardless of lot size and value.

Home Features
It is important for homeowners to discuss the features of their homes with their agents to better determine which options are best for them. Some materials are more expensive to use in rebuilding. Luxury materials add a considerable amount to the rebuilding costs. Home features are considered Coverage A.

Other Property Structures
These are commonly categorized under Coverage B, and they can be any structure that is not attached to the home itself. Fences, sheds, pools, studios, detached garages and similar structures are some common examples. Home insurance policies usually include insurance for separate structures that is about 10 percent of the home's insurance value. If any separate structure on the property is significant in value in comparison with the home itself, it may be best to increase other structures on your policy or create a separate policy for it. 

Property Contents
A home insurance policy usually includes coverage for personal property, which is commonly called Coverage C in a policy. It may be equal to 50 percent or as much as 75 percent of the Coverage A amount. This is sufficient for people who have normal amounts of personal belongings in their homes. For personal property that is greater in value, consider more coverage or separate coverage for rare or very valuable items. Firearms, furs, rare art and expensive electronics are a few examples. High value items should discussed with an agent. 

Large Homes and Other Risks
An insurance company may have an appraiser assess the value on a property for an accurate valuation. This is especially important for custom homes or buildings with very unique features.

Homeowners should always know the values of their homes and other property structures. This is essential for protecting assets and practicing good risk management techniques. Before a disaster strikes, write down a thorough home inventory. If possible, take photographs of valuable items and rooms with the items in them. There are several commercial sites that help homeowners upload the information and store it online for later access. To learn more or to start building a better valuation of the home and its contents, discuss concerns with an agent.

Click here to return to Amity Insurance E-Newsletter January 5, 2015.