Replacement Cost Estimator: How to Estimate

A replacement cost estimator helps insurance companies decide how much it would cost to replace your home.

Jacqueline DeMarco
Jacqueline DeMarco
  • 13+ years writing insurance and personal finance content

  • Insurance, lending, and retirement expert

Jacqueline has contributed content, and her personal finance passion, to dozens of noteworthy financial brands, including Credit Karma, Bankrate, and MagnifyMoney.

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Chris Schafer
Edited byChris Schafer
Chris Schafer
Chris SchaferSenior Editor
  • 15+ years in content creation

  • 7+ years in business and financial services content

Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.

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Updated December 13, 2023

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If you’ve done any research into adjusting your home insurance, you’ve probably come across the term replacement cost estimator. And while you’ve likely heard the term, you may not fully grasp its significance or the benefits it offers.

In essence, replacement cost refers to the amount of money you’d need to receive from your homeowners insurance company to rebuild or replace your home. This replacement includes using materials of similar kind and quality without deducting for depreciation.

Insurance companies determine this amount by using a replacement cost estimator. Here’s a closer look at how a replacement cost estimator works so you can get an accurate estimation for your home.

Quick Facts
  • A replacement cost estimator looks at how much it would cost to replace your home. An appraisal looks at the home’s market value to potential buyers.

  • The 80/20 rule means you should carry insurance coverage amounting to 80% of your home’s replacement value.

  • Actual cash value (ACV) looks at the cost to replace your home factoring in depreciation.

What is a replacement cost estimator?

It’s fairly standard practice in the home insurance industry to use a replacement cost estimator to determine the replacement cost of a home.

These estimators can help predict how much you need to spend to completely rebuild your home using the same quality of materials originally used, regardless of market conditions. Replacement cost coverage is the best way to ensure you can afford to restore your home to its original glory if it’s damaged or you experience a total loss.

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How to estimate your replacement cost

While you can get a replacement cost estimate from your homeowners insurance company or an insurance agent, you can also hire a professional appraiser if you’re looking for a second opinion.

To get a quick idea of your home’s replacement cost, you can plug information about your home into a home replacement cost calculator. When determining your home’s replacement cost value, a handful of different factors are taken into account, including your home’s:

  • Square footage: The bigger your home is, the more it’d cost to repair or replace it, as each additional square foot requires more material and labor.

  • Age: Building standards have changed greatly over the years. For example, older homes may have more expensive exteriors made of materials like solid brick, whereas newer homes may be made with less expensive brick veneer.

  • Fixtures: The style of materials used in your home also comes with varying costs. If you have marble countertops, your kitchen will be more expensive to rebuild than a home with tile counters.

  • Style: Simpler home styles cost less to rebuild than more ornate ones.

  • Features: Floors, the roof, and other areas of your home feature varying materials that come at different price points.

  • Foundation: Is your home built upon a slab or crawlspace? Do you have a basement? Is the basement finished? All kinds of foundation details need to be taken into account.

Understanding key concepts in replacement cost estimation

You can choose replacement cost insurance coverage, which covers the full cost of restoring your home to its original state. You can also choose from a few other types of home insurance coverage options.[1] The goal is to ensure you have enough coverage to rebuild your home if necessary at a price you can afford.

Replacement cost vs. reproduction cost

With reproduction cost coverage, the goal is to duplicate the home using similar materials and construction practices but not always identical ones.[2] You’ll retain the same home layout and design as your original home.

Where you’ll see the biggest disparity in the replacement process is if you own a much older home, like a historic property, that’s very expensive to restore to its original state. Newly built homes won’t experience any significant changes with this type of coverage.

Replacement cost vs. actual cash value

When it comes to actual cash value (ACV) coverage, the insurer measures the current value of the property. They typically do this by taking the replacement cost and then deducting for depreciation.

Depreciation refers to the decrease in the value of a property over time due to factors such as wear and tear, aging, and obsolescence. The great thing about replacement cost coverage is the insurance carrier doesn’t deduct for depreciation.

ACV does deduct for depreciation, however, and this could lead to a large contrast in your coverage compared to your home value, depending on how much your home or items in it have depreciated.

What to know about extended and guaranteed replacement cost

Extended replacement cost and guaranteed replacement cost are essential homeowners insurance policy coverages that protect you against rising replacement costs and natural disasters. Your level of coverage depends on the type of plan you choose.

  • illustration card https://a.storyblok.com/f/162273/x/a0c151e1ba/accidental-tearing-apart-cracking-etc.svg

    Extended replacement cost

    This policy pays a certain percentage, over the policy coverage limit, to rebuild your home. This percentage is often around 20% or more, depending on the insurer. This additional buffer ensures that unexpected spikes in building costs, caused by factors like material shortages or a lack of construction workers, can be covered without financial strain on you.

  • illustration card https://a.storyblok.com/f/162273/100x100/c922a01b77/house.svg

    Guaranteed replacement cost

    This policy type goes a step further than extended replacement cost coverage, covering the complete cost of rebuilding your home to its original state, even if it surpasses the policy limits. This safeguard protects you from unforeseen hikes in construction expenses. However, it’s important to note that this type of policy might not cover upgrades necessary to comply with current building codes. As such, it may not be available for older homes.

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Replacement cost estimator FAQs

Still on the fence about whether or not a replacement cost estimator is right for you? Check out these frequently asked questions on the topic.

  • How is replacement cost calculated?

    Replacement cost is calculated by estimating the amount needed to rebuild or replace a property with materials of similar kind and quality, all without accounting for depreciation. Factors such as construction costs, materials, labor costs, and other associated expenses are considered to determine the total replacement cost of your home.

  • What’s the difference between replacement cost and appraisal?

    An appraisal occurs when you apply for a mortgage loan. You hire a licensed appraiser to review the home and give you the home’s estimated market value.

    The estimated replacement cost, on the other hand, has nothing to do with the market value to other buyers. Instead, it looks at how much it would cost to rebuild the home from the ground up if necessary.[3]

  • What’s the 80/20 rule for home insurance?

    The 80/20 rule in home insurance stipulates that homeowners should have home insurance coverage amounting to at least 80% of their home’s replacement value. Adhering to this rule is crucial for securing full coverage and avoiding penalties for being underinsured.

  • Can the replacement cost estimator account for specific features of your property?

    A replacement cost estimator accounts for specific features of your property. It considers unique aspects like the materials used, architectural details, and unique features when calculating the cost to rebuild or replace your home. This personalized approach ensures a more accurate estimation tailored to the individual characteristics of your property.

  • How often should you reassess the replacement cost of your property?

    Not having an adequate amount of home insurance coverage can really hurt you financially if your home experiences an extreme covered loss. Ideally, you’ll review and update your homeowners insurance coverage each year to make sure your home has the right amount of protection.

Sources

  1. Insurance Information Institute. "Insurance for Your House and Personal Possessions." Accessed November 10, 2023
  2. Corporate Finance Institute. "Cost Approach (Real Estate)." Accessed November 10, 2023
  3. Helpwithmybank.gov. "What is an appraisal? What is an evaluation?." Accessed November 10, 2023
Jacqueline DeMarco
Jacqueline DeMarco

During college, Jacqueline DeMarco interned at a retirement plan advisory firm and was tasked with creating a presentation on the importance of financial wellness. During her research into how money can affect our health, relationships and career, Jacqueline realized just how important financial education is. Jacqueline is a contributor for Insurify and has worked with more than a dozen financial brands, including LendingTree, Capital One, Credit Karma, Fundera, Chime, Bankrate, Student Loan Hero, ValuePenguin, SoFi, and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics that they likely didn’t learn in school.

Chris Schafer
Edited byChris SchaferSenior Editor
Chris Schafer
Chris SchaferSenior Editor
  • 15+ years in content creation

  • 7+ years in business and financial services content

Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.

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