When purchasing home insurance, you may come across two terms, including market cost and replacement value. These terms are related to how much your insurance company might pay you if your home is destroyed due to a covered event. Let’s take a look at these two terms and how they can affect your homeowners insurance.
Market Cost and Replacement Value as It Relates to Home Insurance
When you purchase a homeowners insurance policy, you may have the option to choose between the replacement cost and the market value of your home. It’s important to understand that these two terms are different and result in different cash values.
Market Value
The market value of your home is the price someone might pay for it if you were to put your house up for sale. This means that the market conditions would affect the payout you’d receive if you had to file a claim for the total loss of your house. Other factors that influence the market value of your home include where the home is located, the current interest rates, the current economic situation, the size of the property, its age and its condition.
Market Value Considerations
Market value may not be an accurate assessment of what it would cost to rebuild your home or purchase a comparable home in a different neighborhood. This is especially true when the market value is less than the cost of building a comparable new home. For example, let’s say that the insurance policy was purchased when the homeowner first purchased the house, and at that time, the home was worth $200,000. A few years later, the price to build a new, comparable home increased from $175,000 to $275,000. This means that if the homeowner lost their home due to a covered event and wanted to rebuild on the existing site, their insurance payout wouldn’t cover all of the costs for a comparable home.
Why Homeowners May Prefer Market Value Home Insurance
In some cases, the market value of the home may be greater than the cost to rebuild a comparable home. In this scenario, if the homeowner lost their current home because of a covered event, they may be able to build a bigger house with the insurance payout.
Replacement Cost
The replacement cost of a home is the amount of money that it would cost to build a comparable home today. Costs that factor into building a new house include the cost of materials and labor, the size of the home, the complexity of the design and the types of finishes chosen. If you plan to build on the same lot as your destroyed home, the cost to remove and prepare the site for a new home should also be factored into the price. This means that if you currently own a 2,000-square-foot, two-story home, the replacement cost coverage would pay to build a similar 2,000-square-foot, two-story home. In order to get an accurate replacement cost, it may be necessary to consult with a builder. The builder can then write an estimate for the cost of a comparable new home, and that estimate can be sent to the insurance company.
Potential Problems with Replacement Cost Home Insurance
Replacement cost home insurance is designed to allow homeowners to rebuild their homes if they are destroyed by covered events. However, the insured amount may not always cover the replacement cost of the home, due to varying market factors. Therefore, homeowners should periodically revisit their home insurance to make sure that they are still covered at 100 percent of the rebuild cost.
Why Homeowners May Want Replacement Cost Home Insurance
Homeowners who get replacement cost coverage have the ability to insure their home for 100 percent of the cost to rebuild, regardless of the home’s current market value. This means that if the home is currently valued at $250,000 but the cost to rebuild is $350,000, the homeowner can choose the higher amount.
Choosing the Right Home Insurance Policy with Boyd Insurance Brokerage Inc. in Spokane, WA
Did you know that the median value of a home in Spokane, Washington is $370,000? If that sounds high, it’s not as high as it would cost to build a home in Spokane. Right now, the average cost to build a new home hovers between $175 and $250 per square foot. That means that the cost to build a 2,000-square-foot home would range from $240,000 to $410,000, depending on the finishes and home builder. It also means that the price to rebuild your home could vary wildly.
The good news is that we can help you make sure that your home is properly insured and that you are paying the correct amount for your premiums. After all, no one wants to overpay for their insurance, and no one wants to find out that their home insurance doesn’t cover all the costs of rebuilding after disaster strikes.
If you’re ready to get a quote for a home insurance policy that accurately reflects the cost of rebuilding your home, give us a call at 509-340-2693.
