Replacement cost value is different than your home’s market value
If you own a home, you know about the huge benefits of having a space to call your own. But you’re probably also aware of the additional obligations that come with ownership, including a mortgage and homeowners insurance.
When it comes to homeowners insurance, one of the most important aspects is the replacement cost value of the homeowners policy. This value can be very different than others such as market value. Let’s take a look at some of the differences in a home’s value.
Replacement cost is not the market value of your home
Most homeowners are aware of their homes market value. It’s the real estate price when you buy or sell your house.
Market values are driven by many factors such as location, home quality and features, as well as the supply and demand of home buyers and sellers. Home values in the real estate market can go up and down depending on these various factors.
Replacement cost value is different because it really has little to do with the market value of your home. Replacement value is the cost that it would take to rebuild your house if it were severely damaged due to fire, windstorm, or another covered peril.
Current materials and labor prices directly effect your replacement value
Because an insurance policy is focused on “making you whole” in the event of a loss, the replacement cost value is the amount it would take to rebuild your home from scratch. For this reason, the important factors for replacement cost are the current prices for materials such as building supplies and lumber, as well as current labor costs.
One other wrinkle is that most home rebuilds are considered a custom build. This is different than new construction by larger home builders who may build hundreds of homes each year, and get lower costs on the materials and labor. This is why a custom build can be more expensive than a tract home with a new homebuilder.
Replacement value can adjust due to economic changes in the markets
Now that we’ve established that replacement value looks at current materials and labor costs, you can see how any market changes for these items can influence the replacement value of a home.
For example, the COVID-19 pandemic has caused major supply chain disruptions around the world for much needed supplies and materials. This lack of supply has increased demand, and prices have risen.
There are also inflationary pressures on the prices of most products and services due to current economic conditions. This is why the replacement cost values of homes are going up at a higher rate than before the pandemic.
Be sure to review your replacement cost on your policy each year
As you can see, there are multiple factors that are driving up the prices that a home’s replacement value are based on. This is why it’s important to review your homeowners policy each year to make sure your replacement cost value is adequate.
With prices rising quickly, many homeowners may be currently under insured for their homes. This could leave you with exposure to additional costs if you suffer a catastrophic loss, and don’t have enough coverage to rebuild your home to its previous condition.
Get assistance from an experienced insurance agent
As you can see, it can be difficult to determine your homes’ current replacement value on your own. That’s why it’s important to review this with an experienced insurance agent who can help you identify the appropriate value for your homeowners insurance policy. Then you can rest comfortably knowing that your home is fully protected.
