While homeowners insurance policies can have many different coverage options, the most widely known coverage is coverage for physical damage to the structure of the home. We all know that homeowners insurance should cover damage done to the home by way of hail, wind, fire, lighting, and other perils, but how much coverage is enough coverage to feel comfortable? Using a replacement cost estimator can help us to find the perfect amount of coverage for a specific home.
What is Replacement Cost and why is it important?
When insuring a home, one of the first things to establish is the replacement cost of the home. Replacement cost is the amount that it will cost to rebuild a home in the case of a total loss. If a home is ever deemed to be a total loss after experiencing data, the insurance company will need to pay out for all expenses involved in rebuilding the house with the same level of quality and materials as the original home as long as the policy includes replacement cost coverage. Having an accurate number for the estimated replacement cost of a home is essential to have proper coverage on the policy. Having replacement cost estimated too low can lead to a situation where your home insurance cannot pay out enough to replace your home. Having replacement cost too high can lead to you overpaying for your homeowners insurance policy.
What is a Replacement Cost Estimator?
With replacement cost being such an important factor, we can’t leave it up to ballparking. Your insurance agent should use a tool called a replacement cost estimator in order to determine how much it will cost to replace your home in the case of a total loss. While each insurance company will typically have its own version of a replacement cost estimator, each one will take inputs about the home such as square footage, building materials, quality of home systems, and add-ons to estimate the replacement cost of the home. It is important to be sure that the home coverage limit on the policy is greater than or equal to the estimated replacement cost.
Should the Replacement Cost be close to the amount that you paid for the house?
Replacement Cost will sometimes be close to the Market Value, or the amount that the home is worth, but this is not always the case. It is important to understand that these two numbers may not be very close, and that is totally fine. The cost of the home is greatly impacted by factors such as the housing market, location, lot size, and more. Since the insurance policy is in place to repair or replace the physical structures of the home, replacement cost is only factoring in the cost of materials and labor to rebuild. For this reason, we often see a drastic difference in the estimated replacement cost and the cost of the home. In these cases, talk with your insurance agent to be sure that they are insuring the home for replacement cost as opposed to market value.
A Replacement Cost Estimator is an essential tool when creating a solid home insurance policy. Using one will help the insurance agent as well as the buyer to understand how much coverage is needed to properly protect a house. If you are in the process of shopping for homeowners insurance, you will want to check with your agent to be sure that they ran an accurate replacement cost estimator to determine the limit of the policy. This way, you can rest easy knowing that your homeowners insurance has a limit that is strong enough to replace your home.
