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Edited by John Leach
Last Updated July 26, 2021
Your home is more than your home. It’s also an important real estate investment. Insuring for replacement cost is the best way to protect your investment.
Bad things happen to good homes, and homeowners insurance is there to make sure you don’t have to pay when something unexpected happens. There might come a time when you need to calculate your home’s replacement cost value. You will want to figure out your home’s replacement cost if you purchase a policy with replacement cost coverage. Or you would calculate it if your insurer gives you a replacement cost estimate on your home but you think it’s wrong.
But. How do you estimate the replacement cost of your home? Follow along in our replacement cost estimator guide. By the end, you’ll know how to get the best out of your insurance coverage, even when the unthinkable happens.
Do you have the best homeowners insurance for you and your family? Insurify lets you compare home insurance companies and different coverage levels. That way, you can protect your home in the best way possible.
What Is Replacement Cost for Home Insurance?
Replacement cost is known as replacement cost value in home insurance. The replacement cost value is the way insurers get accurate estimates when settling home insurance claims. Maybe a fire occurred, and your home needs to be rebuilt. Or possibly your home is damaged, and your roof needs to be repaired.
When you buy home insurance, the insurance company will calculate the estimated replacement cost. The estimated replacement cost includes rebuilding costs and labor costs. Importantly, it’s not the same as the market value nor the actual cash value of your home. The insurer pays out the valuation of the replacement cost once a claim is accepted. Minus your deductible, of course.
Replacement Cost Coverage vs. Actual Cash Value
It’s always wise to insure your home based on your home’s replacement cost value rather than the actual cash value. Actual cash value (ACV) uses depreciation when determining the payout of a large claim. ACV can cause many problems if something bad happens to your home, especially if you own an older home. Policyholders often have to pay out of pocket if the rebuild cost exceeds the valuation with ACV.
Most insurers will determine an item’s or home’s lifespan and subtract a percentage for each year since the purchase date when factoring costs. Let’s say the siding on your home was added 20 years ago and has a 25-year lifespan. A storm comes and wipes your siding away. The insurance company values your siding after 20 years of depreciation, so they will only pay a small amount to replace it. That means you will be paying out of pocket for most of the new siding. Replacement cost is better in all scenarios.
The replacement cost value covers construction costs and materials up to your coverage amount. And it won’t take depreciation into account. Now let’s say you are in the same scenario where you need new siding but have replacement cost coverage. Thankfully, your dwelling coverage will include the building cost. Coverage will be included even if material and labor costs have risen over the years.
Your personal property works the same way. Let’s say your home burns down, and all your possessions are gone, including your laptop. If you have a replacement cost policy on your personal property coverage, you will get the replacement value for a similar model of computer. As long as it is within your coverage limits, you’re covered.
When to Use Replacement Cost on a Homeowners Insurance Policy
Your policy will have a declaration page stating whether you have replacement cost coverage. If you notice you do not already have replacement cost on your insurance policy, talk to your insurance agent. Your agent can always add replacement cost coverage to your policy for a small price. And it’s worth it.
Note that your policy will vary by which state you live in and by the insurance company. But it’s always good to study your policy to learn when replacement cost coverage applies to your policy. Check your insurance policy so you know what your dwelling coverage and personal property coverage policy limits are. It’s always wise to talk with your insurance agent to determine whether you are covered for the right amount of insurance if something bad happens.
Factors Affecting Replacement Cost Estimates
One day, you may face a horrible event that leaves your home severely damaged or destroyed. And if something terrible like a fire or windstorm happens, you shouldn’t have to worry about your home’s rebuild costs. Knowing you have the right amount of insurance from the start is your best bet.
Sometimes, homeowners assume the replacement cost is directly equal to their home’s current market value. The truth is, the rebuild cost and the home market value are different amounts. Your house might sell for $300,000, but the rebuild costs may only be $150,000. It’s safe to say that going off assumptions isn’t best when estimating your home’s replacement cost.
Here are some more factors that affect the rebuild cost of your home:
Age of Your Home
Remember, your home’s market value includes the land value. Usually, rebuilding costs are significantly less than the current market value. But sometimes, rebuilding costs outpace the market value if it’s an older home. Maybe your older home has intricate details like custom molding that are too expensive to replicate. Perhaps your home features outdated electrical or plumbing systems. In that case, the rebuilding costs will be more than the current market value of your home.
Older homes often aren’t kept up to date with building codes. And as a homeowner, you aren’t necessarily required to upgrade your home as building codes change. But if your older home needs to be rebuilt, current building codes will apply.
Coverage levels in your policy can impact the structure of your home and personal property. Personal property accounts for 50 to 70 percent of your dwelling limit. Your personal belongings are likely underinsured. If needed, purchase an endorsement or rider on expensive items like electronics, antiques, and jewelry.
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Replacement Cost Calculator
Most insurance agents will help you calculate the replacement cost value of your home. You may not like the replacement cost estimate your insurance agent comes up with. You can always hire an appraiser to estimate the replacement cost of your home.
An independent appraiser is known to be the most accurate way to find the replacement cost of a home. They’ll inspect your home accurately to see all the costs that go into rebuilding it. They are also up to date with building codes in your area and can more accurately give you an estimate with rebuilding up to code. The appraiser will look at the following on your home:
Structural framing, including materials
Foundation and footings
Roof condition and materials
Ceiling materials and condition
Exterior and interior walls
Plumbing systems and electric wiring
Heating and cooling systems and equipment
Finishes on the interior, like walls, doors, cabinetry, and any built-ins
Tips for Estimating Replacement Cost Value
You might want to do a DIY replacement cost estimate. You can call around local home builders and insurance agents to develop the likely building cost per square foot in your area. Take the price per square foot and multiply that amount by your own home’s square footage to find the building cost
Price Per Square Foot X Your Home’s Square Footage = Building Cost
Usually, the price per square foot on a build is between $100 to $160 per square foot. Of course, it depends on where your home is located. Then, you can factor in the following costs:
Roofing materials: contact a local roofing company for estimates
Flooring types: talk to a local contractor for pricing estimates
Exteriors: patios, decks, and pools
Interior features: bathroom fixtures, kitchen appliances, cabinets, countertops, etc.
Personal belongings: take an inventory and upload pictures of your stuff to the cloud
Next, you should do the following to ensure you get the most out of replacement value coverage:
Always keep a detailed inventory of all your belongings with serial numbers, the purchase date, and price.
Always look at the local building costs and check over your home insurance policy to see if building costs have risen year over year. In 2021, lumber and other materials have sometimes doubled in price! If necessary, ask your insurance agent about an inflation guard clause. The clause will adjust your dwelling limits based on current construction costs.
Take photos and a video of your home’s exterior and interior with appliances, flooring, cabinets, roofing, and all structures on your property.
Add a rider or endorsement on your policy for any expensive personal belongings.
Online Replacement Cost Calculators
Online calculators tend to be less accurate than calling for quotes in your area as they use average costs. But most replacement cost calculators are free. Note that it’s best to choose either an appraiser or to do the estimate yourself. But an online replacement cost calculator can lead you in the right direction. Bluehammer and Craftsman have replacement cost estimator software that may be helpful.
Want to make the best out of your home insurance policy? Check and compare insurance quotes to make sure you’re getting the best rates possible. Insurify makes it easy and simple to do in just minutes. Try it out now!
Frequently Asked Questions
No, market value and replacement cost are almost always different. The market's current environment dictates market value.
You don't always have to insure your home for your home's replacement cost value, but it's wise. When you own an older home, especially, and something terrible happens, you might be stuck paying for rebuild costs.
Extended replacement cost covers over your limit by a certain percentage. Extended replacement cost is helpful with taking replacement cost a step further. Use extended replacement cost if you're afraid rebuild costs might go above coverage limits.
Always Estimate Replacement Cost On Home Insurance
Whichever method you choose—your insurer, an appraiser, or a DIY approach—it’s good to know the replacement cost of your home. That way, you know what coverage levels you need. If you need to pay slightly more on your insurance premium, it’s probably worth it to keep your home protected.
Are you looking for a place to start? Use Insurify’s tool to get free home insurance quotes from the best home insurance comparison sites in minutes. It doesn’t take much time to save
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