Let’s say your home was completely destroyed by a tornado. Fortunately, you have homeowners insurance, and tornados are covered in your policy.
Okay, now consider your home at its current state. In the scenario above, how much of a payout would you have been satisfied with? In other words, how much would it have taken to completely rebuild your home?
Are you having a hard time coming up with an amount?
This “amount” is called your home’s replacement cost. And you’re not alone in having trouble figuring it out.
The Importance of Calculating Replacement Cost
When it comes to purchasing a homeowners insurance policy, the most essential number you’ll need to come up with will be the replacement cost. Essentially, this will be equivalent to the amount of coverage A you choose for your insurance policy (how much you insure your home for).
Before we go any further, however, it’s important we make a distinction: Replacement cost is not the same as market value.
Replacement cost is the cost it would take to replace your home and bring it back to its original appearance and utility prior to the disaster that destroyed it. On the other hand, market value, or actual cash value (ACV), is how much your home is worth on the market.
It should go without saying that you don’t want to base your coverage A on the market value of your home. If you do this, your insurance company will take your home’s market value, subtract the depreciation, and come up with a number that will almost certainly be much lower than what the replacement cost would be.
Why? Because it’s always more expensive to build a house.
A house that’s already built may have a depreciated market value, but you’re not paying for things like building permits, architects, a construction team, roofers, flooring specialists, brand-new materials, and many other elements that are essential during building.
How Do You Calculate Your Home’s Replacement Cost?
Calculating replacement cost is a time-consuming endeavor. Basically, you’re breaking your home down into parts and figuring out the construction value for each one.
Most calculations start with the average building price per square foot in your area. You can get this average by researching going rates of builders in your area. Multiply the average by the square footage of your home.
Next, estimate some other important values, including replacement values for your:
- Exterior siding/stone/brick/other material
- Permanent fixtures
Many homeowners wonder about the things inside their homes. This is called personal property (portable items like clothes, jewelry, furniture, books, etc.). When discussing replacement cost as it pertains to coverage A on your insurance policy, you should not include personal property. This will be included under coverage C most of the time.
Furthermore, remember that all outbuildings that are not attached to the home (a detached garage, for example) should not be included in the replacement cost either. These structures can be included under coverage B most of the time.
Working With an Insurance Agency
Pricing every aspect of your home’s roof, flooring, exterior finish, windows, and more can be difficult. That’s why most homeowners end up going directly to an insurance agency for assistance with calculating replacement cost.
Our experienced agents at Feivor Insurance would be happy to plug your numbers into our Replacement Cost Estimator to come up with an accurate replacement cost for your home.
We can also help you ensure compliance with lenders and co-insurance regulations and offer you protection against inflation. Call or stop in today to learn more!