Owning a home can be a joy as well as a headache. Dealing with problems as they arise can be costly. For most people, a home will be one of the largest investments they make in their lifetimes. Protecting their investment from the many hazards that can damage a home should be a priority for any home owner. The best way to protect a home is through an appropriately designed homeowner’s insurance policy.
What type and amount of insurance do you need to protect your home? It depends. There are many factors to consider when designing the right policy. One of the most important, and frequently over looked aspects of a policy is the difference between the Market Value and Replacement Cost of a home.
A common mistake many homeowners make is insuring their home based on the current market value of the home. In some instances this may be the right option for some home owners, but that’s typically not the case.
Market value vs. Replacement Cost
Replacement cost is the amount of money you would need to rebuild your home to its previous condition if a loss were to occur.
Market value is the current value of your home based on the purchase price and can fluctuate with the real-estate market.
Buying coverage based on market value can leave the homeowner exposed to risk if the market value of a home is less than the replacement cost.
Jess buys a home for $250,000. She decides to buy a homeowners insurance policy. Jess thinks she needs a $250,000 policy because that is what purchased the home for. Jess talks to her agent who suggests that may not be a good idea.
The cost to rebuild the home would actually be $325,000. Considering the cost of building the home from the ground up, including square footage, building materials, the type and quality of construction, including features and add-ons, would result a total cost of $325,000. If jess wants a policy that fully covers the cost of replacing the home she will need a policy that covers the full $325,000 replacement cost. If Jess insures her home for less than that amount she may have a policy that is actual cash value meaning she may only receive the depreciated value of the home if there is a claim, even in the event of a partial loss.
So, how do you figure out the replacement cost of your home? Your homeowner’s insurance company can calculate how much it would cost to rebuild your home based on the following:
- Square footage of your home
- Type and quality of your home’s construction
- Any updates, special features or add-ons to your home
- Quality and cost of materials used in your home
It is important to update your insurance policy as you make any changes to you home. Upgrades are not automatically covered by your insurance and should be added to your policy as needed.
It is also important to consider the coverage you have for other structures on your property. For most policies, the amount of insurance coverage you receive for other structures is 10 percent of the amount of coverage you receive on your home. For example, if your insurance policy covers $300,000 on your home, the coverage you would receive for other structures on your property would be $30,000 combined. If you believe that the structures on your property are worth more than 10 percent of your home coverage, you should consider additional coverage. It’s also important to note detached structures are only covered if they are used personally, not for business. If you use the detached garage to store your business contents, your home policy will most likely exclude coverage for the building.
Client Advocates at Miller’s Insurance are here to help you design a homeowners insurance policy that works for you and your home. They can walk you through the many options both within and across the nation’s top carriers to help you find the right fit.