Many home insurance buyers in the Twin Cities are confused by two commonly used terms in the home insurance world: Replacement cost and market value.
Both replacement cost and market value are valuations of a home or personal property. In other words, both of these terms refer to how much your home is worth; however, the way they represent the value of your home is quite different.
In this article, we will unveil the difference between replacement cost and market value, which should help you make a final decision on how much to insure your home for.
What is market value?
You’ve probably already surmised that market value refers to how much your home is worth on the market. If you were to put your home up for sale right now, how much could you get for it in a fair sale? A “fair sale” refers to a home sale that is between a willing buyer and a willing seller.
What is replacement cost?
Replacement cost is a valuation of your home that may seem a little more complicated.
On its face, replacement cost refers to the price it would take to replace your home if it was destroyed. As you might imagine, however, determining this value is quite involved.
To determine the replacement cost of your home, you need to consider a multitude of factors. For instance, you’ll need to consider how old your home is, how many times it has been renovated since it was built (if it was renovated at all), what types of materials are involved in the structure of your home (including the walls, floors, structures, and roof), and whether prices for materials or labor have changed since it was built.
Overall, remember that replacement cost only refers to how much it would be to replace the structure of your home, also known as your home’s “real property.”
Real property refers to the actual land or property that your home sits on as well as the structure of your home, including the rooms, roof, floors, walls, and permanent structures like fireplaces. If you have an attached garage or, sometimes, an attached deck, this may be included in the replacement cost as well.
When you are considering replacement cost, you’ll want to remember a few other things too:
- Think of replacing your home completely— as if your home had been completely burned to the ground in a fire: How much would it take to replace the entire thing to its original utility?
- Do not include “personal property.” This includes moveable things that are inside your home, like furniture and personal belongings.
Using replacement cost to determine coverage A
Coverage A is the amount you want to insure your home for. More or less, your Coverage A amount is going to be the same as the replacement cost of your home. Remember that it will not be the market value – as some people mistakenly think.
This can be confusing because most people assume they should insure their home for the amount they paid for it. If you did this, however, you wouldn’t be considering that:
- The cost of replacing certain materials can change over time.
- The price you paid for the actual land plot you own won’t need to be replaced after a covered disaster.
- Land value changes over time. You may have paid a premium for land near the Twin Cities when you purchased your home, but again, that value won’t need to be replaced.
Have questions about coverage A, replacement cost, or property co-insurance? Patriot Insurance is here to help.