Do you have enough insurance coverage to cover the cost of replacement to rebuild your home and replace all of your belongings if disaster strikes? This is because inflation and natural catastrophes can dramatically increase the cost of home construction, meaning you might need more coverage than you think.<\/p>\n\n\n\n
When you\u2019re buying a homeowners insurance policy, you can choose between actual cash value or replacement cost for your personal property coverage.<\/p>\n\n\n\n
Personal property coverage insures your possessions, including furniture, electronics, clothes, appliances, and other items in your home, up to the policy\u2019s limit. Choosing between actual cash value or replacement cost coverage influences how much your insurer will reimburse if you file a claim and how much you pay for homeowners insurance.<\/p>\n\n\n\n
Replacement cost insurance refers to having enough coverage to rebuild the home and replace lost items. Homeowners can buy a replacement cost policy that covers their dwelling and personal property (like electronics, furniture, and clothing). It can also offer both dwelling and personal property coverage.<\/p>\n\n\n\n
Most homeowners insurance policies provide some coverage for the loss of personal belongings. This coverage is typically for 50% to 70% of the amount of insurance on the dwelling. So, if a house is insured for $300,000, insurance will pay out $150,000 to $210,000 for personal property.<\/p>\n\n\n\n
For some people, that’s plenty of coverage. For anyone whose personal property is valued at more than their standard homeowners’ policy provides, it makes sense to buy a replacement cost insurance policy that covers personal possessions. Personal property replacement cost coverage does not apply only to homeowners. <\/p>\n\n\n\n
Renters insurance replacement cost provides the same level of security for those who lease their homes.<\/p>\n\n\n\n
When you file a claim, your insurer may not pay out the full replacement cost of your home or belongings right away. Instead, you may get an actual cash value payment first. Then you\u2019ll receive the balance of the payout once you\u2019ve replaced the item and submitted your receipt to your insurer as proof.<\/p>\n\n\n\n
Dwelling, other structures, and personal property coverage are generally subject to a deductible. A deductible is the amount of your claim an insurer expects you to cover yourself, so it will be subtracted from your payout.<\/p>\n\n\n\n
Here\u2019s an example: A tree falls on your home, damaging your 5-year-old roof. You file a claim to replace it. The insurance company estimates that your existing roof is worth about $8,000 and that it\u2019ll cost $12,000 to buy a new one. The deductible on your policy is $1,000. <\/p>\n\n\n\n
The insurer mails you an initial check for $7,000 \u2014 the actual cash value of your roof ($8,000) minus your $1,000 deductible. Once you\u2019ve replaced the roof, you send the receipt from the contractor to your insurance company, which mails you a check for the remaining $4,000.<\/p>\n\n\n\n
An actual cash value insurance policy pays what your items are worth minus depreciation, or the loss of value over time. For example, if your sofa is lost in a covered fire, your insurer will pay only what the sofa was worth when it was destroyed, not the amount it would cost to replace it with a new one.<\/p>\n\n\n\n
Choosing actual cash value coverage will usually save you money on your insurance premiums. However, it could cost you more in the long run if many belongings are damaged at once and your insurance payout isn\u2019t enough to replace them. Most insurers offer the option to upgrade to replacement cost coverage for your belongings.<\/p>\n\n\n\n
While actual cash value coverage is most common in your policy\u2019s personal property section, it may also apply to your roof. That means if a hailstorm damages your roof halfway through its expected lifespan, your insurance company might pay only half the amount you\u2019d need to replace it.<\/p>\n\n\n\n
Check your home insurance declarations page or call your agent to find out whether you have replacement cost or actual cash value coverage.<\/p>\n\n\n\n
RCV and market value are not the same, especially when it comes to home insurance. Market value is the amount an appraiser deems a home or property is worth or the amount that someone is willing to pay for that home or property, including the land. It is based on what the current market is willing to pay.<\/p>\n\n\n\n
Homeowners’ insurance companies do not use\u00a0market value\u00a0when calculating costs for dwelling or personal property coverage. With RCV coverage, the cost to rebuild the home\u2019s structure or replace personal property at today\u2019s prices is accounted for in the dwelling coverage and is paid for following a covered loss. <\/p>\n\n\n\n
This will likely be lower than the market value, as it does not consider land value.<\/p>\n\n\n\n
When you first purchase your home policy, your agent calculates the current replacement value of your home. However, there are situations where the replacement cost of your home can change drastically throughout the year. <\/p>\n\n\n\n
Inflation impacts the cost of materials and labor throughout the year and as the economy fluctuates. <\/p>\n\n\n\n
In situations with widespread loss, the sudden high demand for materials and labor, along with transportation difficulties, can also drastically inflate the replacement cost of your home. To account for this, many companies offer replacement cost endorsements for your dwelling that may help you avoid expensive out-of-pocket expenses.<\/p>\n\n\n\n
These endorsements are typically more expensive than standard dwelling coverage. However, if you want more complete financial protection over the long term, they may be options worth considering. Speaking with your insurance agent may help you determine if these types of coverage are right for you.<\/p>\n\n\n\n
As straightforward as replacement cost sounds, there are a number of factors that go into determining how much a homeowner needs. Here are a few examples:<\/p>\n\n\n\n
As mentioned, the market value of a home may not represent the true cost of rebuilding. After all, the land on which a home sits will not need to be replaced if the home is destroyed, but unusual features (like extraordinary woodwork or stained glass windows) need to be factored in. Homeowners have three options for coming up with an accurate replacement cost:<\/p>\n\n\n\n
Insurance companies evaluate your home\u2019s characteristics, such as building materials, age, square footage and labor costs in your area to calculate your home\u2019s dwelling coverage amount. A percentage of your dwelling amount determines your personal property coverage amount. <\/p>\n\n\n\n
Once those figures are determined, your policy would cover either RCV or ACV for damaged or destroyed items that fall within these coverage categories.<\/p>\n\n\n\n
Therefore, your insurance company does not determine replacement cost, per se. You and your insurance company will determine the coverage amounts where replacement cost can apply, along with dwelling, other structures and personal property coverage. In many cases, replacement cost coverage will apply to your dwelling and other structures coverage. <\/p>\n\n\n\n
However, personal property coverage varies by insurer. It may be best to review how replacement cost coverage applies (or does not apply) to your coverage to avoid surprises should a claim occur.<\/p>\n\n\n\n
While replacement cost insurance offers more financial protection than actual cash value coverage, you could still end up underinsured if you don\u2019t set your coverage limits high enough.<\/p>\n\n\n\n
Insurers use replacement cost calculators to determine how much dwelling coverage you\u2019ll need to rebuild your home. The estimate will incorporate various information about your home, like its square footage, construction materials and the year it was built.<\/p>\n\n\n\n
You can also determine your home\u2019s replacement cost on your own. One method involves multiplying your home\u2019s square footage by the current cost of construction per square foot in your area, Alan Himmel, a public insurance adjuster in Florida, said by email. \u201cYou can get an idea of per square foot building costs by calling the builders association in your area, an insurance agent, or even \u2026 contractors.\u201d <\/p>\n\n\n\n
The average cost to build a house is about $150 per square foot, according to HomeAdvisor.<\/p>\n\n\n\n
You can also hire a contractor to provide a construction estimate or have an independent insurance agency pull multiple homeowners insurance quotes to get a sense of what each insurer estimates it will cost to rebuild your home.<\/p>\n\n\n\n