A lot of our clients ask us, "What is this thing called 'Replacement Cost"?"
My name is Zack Baldwin, I own TexPro Insurance and love to build factual information for my customers in an easy way to understand. Although insurance is often brushed over as a basic commodity, and not complex-> that is the furthest from the truth. If there is anything you can take from my blog, is how important it is to allow a professional to handle insurance needs for you. If you need help, give me a call. I hope this information serves you well.
Designing your Homeowners Insurance Policy
“What is this thing called 'Replacement Cost? How is this different from Market Value?.”
Replacement Cost vs. Market Value
A common topic that comes up when shopping for home insurance is the way your policy covers the VALUE of your home. Understanding how these terms and how the apply in insurance will help you make the right financial decisions for your hard earned assets.
Replacement cost, or sometimes called “reconstruction cost”, is the cost necessary to repair or replace your entire home.
Market Value is the amount that your home would sell or market for in its current condition, and based on the current market & economy. Market Value is influenced by outside conditions beyond constructions costs, such as the current economy, school zones, crime rankings, etc.
The point in calculating Replacement Cost, is to ensure that in any market condition, your home will be replaced or repaired back. You wouldn't want to insure 2/3's of your home, and that is why Replacement Cost calculations exist, to make sure that you are financially equipped with your insurance policy in a total loss.
When your home is insured at Replacement Cost, your insurance company will cover you (subject to policy limits) for the cost to rebuild or repair your home.
How is this determined?
Replacement Cost is calculated by using a special insurance calculator that is designed to properly determine the current replacement value of your home called a Replacement Cost Calculator, or Replacement Cost Valuation (RCV). Construction costs do adjust over time, making sure to review your policy annually to ensure proper valuation is essential.
Why is it important to have Replacement Cost?
If your home were to incur a total loss, having the proper Replacement Cost value can protect you from large out-of-pocket costs. For example, if your home is currently worth $175,000 on the market, but it costs $225,000 to rebuild, an instance such as a fire that completely destroys the house could leave you with that $50,000 out-of-pocket.
What is Extended Replacement Cost?
Some insurance carriers offer an awesome feature that allows you to insure your home with an extended coverage amount over the calculated Replacement Cost. These are often found with home value extension levels from 25% to 100% of the Replacement Cost Value. This is an excellent tool to prevent any sort of potential excess if a total loss occurs, as well as to protect against construction material inflation.
For example, your home is calculated at a Replacement Cost Value of $200,000 and is insured with an insurance policy. Your home suffers a covered fire loss, and you know have to totally rebuild the home. During the policy term, construction materials for wood has taken a 23% increase in cost due to limited supply. Your home after the wood price increase is now in excess of the policy limits, now being estimated at $225,000 to rebuild. However, with a '25% Dwelling Extension' feature, this would leave you covered with a total amount of $250,000 ($200,000 + $50,000 extension), and therefore leaving you at rest knowing you can fully rebuild your home back without any out-of-pocket expense.
"Insurance is a beautiful tool in this world, as long as it's used correctly."
-Zack Baldwin
TexPro Insurance President & Regular Human Just Like You