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.