Your home will most likely be the largest and longest lasting investment you make in your lifetime. Of course, before jumping in there are lots of things to consider, like, what type of area you want to live in (i.e. suburban, urban, rural), what the surrounding community is like, and your proximity to other areas such as a major city or industry.
Once you’ve settled into your dream home, there’s no doubt you’ll want to protect the investment, and that is where your homeowners insurance policy comes in. There are a variety of insurance coverages you can buy—from auto to homeowners, but undoubtedly, the most important is your dwelling insurance coverage. Dwelling insurance encompasses coverage for the structure of the home along with any permanent fixtures. When determining how much to insure the home for, people often confuse the market value of their home with the replacement cost. In this article, we will explore the difference to help you better understand how to accurately insure your property.
Market value is the amount for which you could sell your property to potential buyers today. This number includes not only the physical dwelling, but also the surrounding land. The calculation of market value also considers the quality of neighboring areas, the crime rate, the school system, etc. Some choose to insure their home at its market value, as a way to get cheaper insurance and recoup at least part of their investment after a loss. However, oftentimes a home’s market value can differ from its replacement value and leave you, the homeowner, with inadequate coverage to rebuild your home.
Insuring a home at replacement value means it is insured for the amount it would cost to fully replace the dwelling and anything permanently attached to it–such as a deck or attached garage. This value is based off the construction of the home, as well as square footage. It is usually advised to insure your home at 100% of the assessed replacement value, though some companies will allow you to dip below this value at your discretion. You can hire a licensed inspector to calculate this cost, or your insurance company may have it done for you at the start of your policy. The costs of labor to repair the home as well as materials to rebuild it can increase over time. A replacement value homeowners insurance policy with an inflation clause—offered by some insurance companies–will guard against this issue by incrementally increasing the coverage on the policy each year.
Insuring your home at replacement value is normally the safer option. This type of home insurance coverage will likely be enacted in scenarios of a total or catastrophic loss where the home would need to be reconstructed, such as in the instance of a fire. A replacement value home insurance policy will help you rebuild when the cost of rebuilding may be more than what you paid for the home after all things are considered.