It’s important to make sure your home insurance policy has enough coverage for your home and this can start with understanding both housing coverage and how your policy calculates replacement cost. Home cover is what would rebuild or repair your home due to a covered loss and for this reason may be the most critical part of your home insurance policy.
But when it comes to determining the housing coverage you need, you also need to understand replacement cost. This is the cost of rebuilding your home, so it is imperative that you choose a home coverage amount that properly insures your home.
[sc code=”key_takeaways” headline_label=”Key takeaways” headline_type=”h3″ takeaways_list=”A home’s replacement cost is calculated using a variety of characteristics, such as the age, square footage, features and foundation type of the home.;Buying homeowners insurance at replacement cost value ensures your home can be built new again following a covered loss; actual cash value factors in your home’s depreciated value.;Extended replacement cost provides an increase in your home’s dwelling coverage, which can help guard against inflation and increasing repair and construction costs.” colors_variant=”blue”]What is the cost of replacing a house?
The replacement cost of a home is the amount it would cost to rebuild your home using the same materials if there is damage or you need a complete rebuild. This cost is a combination of many factors, including construction costs, features of the home, quality of materials used to build the home, and square footage. This is the amount it would take to rebuild the house from top to bottom as it was before it was damaged or destroyed.
Another important thing to remember is that replacement cost is not equal to the market value of your home. Market value is determined by the price your home could sell for under current market conditions. Market value also incorporates many other factors into the price, such as land value, local amenities, and nearby schools.
Calculating the replacement cost of your home
Although calculating the cost of replacing your home can seem daunting, there are many resources available to help you. A good place to start may be to request an estimate from a local contractor or review your property’s inspection report.
You may also benefit from working directly with a licensed insurance agent. Local agents may know the area and have a better idea of the associated construction costs, but many insurance companies will also use a replacement cost estimator to calculate this amount. In general, the features of your home, listed below, will have the biggest impact on your home’s replacement cost:
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Age of the house. The year of construction of your house has a great influence, because there are different construction standards depending on the period of construction of your house. The age of your home can provide insight into the type of exterior construction you have, such as solid brick or brick veneer, or even the type of electrical equipment in your home, such as knob-and-tube wiring or circuit breakers.
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Square feet. Naturally, the larger your home, the more it will cost to replace or rebuild it. The higher the square footage, the higher the replacement cost.
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Features. The features of your home include everything from flooring materials, such as carpet, tile, hardwood, to roofing materials. Each of these features affects the replacement cost, and the higher the quality of materials used for the features, the higher the replacement cost.
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Fixtures. Like the characteristics, the quality of the fixtures in the house is also used. Light fixtures include items such as your counters, cabinets, and lighting. Higher quality fixtures mean higher replacement cost.
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Home-style. If your home’s design or style is more complicated to rebuild or replace, this will likely increase the replacement cost.
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Type of foundation. Property insurers want to know if your home is built on a slab, crawlspace, or basement. If your home has a foundation in the basement, insurers will want to know if the basement is finished.
Once the amount of your home coverage has been determined, it becomes coverage A of your home insurance policy. Several other coverage options in your home insurance policy will be affected by this amount. For example, your Coverage B, also known as Other Structures Coverage, is typically 10% of your Coverage A amount and your Coverage C, also known as Personal Property Coverage, is typically 50%. % to 75% of your coverage A.
Home insurance at actual cash value or replacement value
The housing coverage of an insurance policy can be calculated at actual cash value (ACV) or replacement cost value (RCV). The difference between ACV and RCV is how each takes depreciation into account.
ACV will pay to rebuild your home at its current market value, factoring in depreciation, while RCV will rebuild your home based on the cost of current building materials without factoring in depreciation. Your home insurance policy will specify whether certain protections are calculated at ACV or RCV, which adjustments are possible and the associated cost.
Types of Replacement Cost Policies
It is important to realize that replacement cost coverage uses an estimate and does not guarantee that the calculated amount will fully cover a total loss of your home. To further offset your financial risk, a home insurance company typically offers replacement cost policies and extended home coverage. You will then need to decide which option best suits your budget and preferences.
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Standard replacement cost: The typical home insurance policy includes the standard replacement cost and provides the most basic financial protection. It will pay to repair or rebuild your home without any depreciation taken into account.
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Extended replacement cost: To add extra protection against rising costs, you can choose the extended replacement cost option. It increases the Cover A value of your home by a certain percentage above your housing limit. Most policies offer a 25% or 50% option. So, if your housing limit is $200,000, a 25% option would instead insure the rebuilding cost up to $250,000.
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Guaranteed replacement cost: This coverage will reimburse you regardless of the cost of the building for a replacement or total reconstruction. Although this is the most expensive option, it will provide the best protection against depreciation or rising construction costs. If you are interested in this option, be sure to check its availability in your state or with the insurer, as it is not available everywhere.
Frequently Asked Questions
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How do I calculate the replacement value of my house?
A quick method to estimate your home’s replacement cost is to multiply the square footage of your home by the average cost per square foot in your area. However, this is only a guideline. You may have recently remodeled parts of your home, for example, or added an extension that would require more coverage. To get a more accurate estimate, it may be helpful to contact an appraiser or contractor, or work with a licensed insurance agent who will use a replacement cost calculator to more accurately determine the replacement cost of your home.
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How much will a home insurance policy cost?
The average cost of home insurance in the United States is $1,428 per year for $250,000 of home coverage. But that cost varies based on a variety of reasons, including your zip code, coverage options selected, age of the home, and features of your home.
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How much home insurance should I take out?
Each homeowner has their own insurance needs. To determine how much to buy, it’s best to speak with a licensed insurance agent or get an online quote for your home insurance policy. You can also compare several insurance companies to help you determine what options are offered by each company. Although most companies calculate a similar home coverage amount for your home, coverage options and endorsements may vary.
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Which is better: ACV or home replacement cost?
Although you can pay extra for replacement cost coverage, it may be worth the extra cost. Replacement cost will pay to replace your home and belongings with new items and construction, while actual cash value takes into account depreciation, meaning you may have to go out of pocket to get new items. While housing replacement cost is generally standard, many companies offer the option to upgrade personal property at replacement cost.
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