Homeowner insurance replacement value is an estimate of how much it would cost to replace your home–that is, to rebuild or repair it in the same way as when it was first constructed. It’s an important value to know when deciding on home insurance coverage as it affects your premiums and gives you an idea of how much value you need in your plan.
What Is Replacement Value?
Replacement value considers the estimated cost of a rebuild using similar materials as the original construction. It involves knowing how much materials, labour, etc. will set you back for the project.
Insurance providers look at a home’s replacement value to provide guidance on the right amount of coverage and to define how much you’ll pay in premiums.
Replacement Value Versus Market Value
Replacement value is the cost of replacing your entire home using the same parameters as its initial construction. Market value, on the other hand, is the value of a home in the current housing market, which may not necessarily match how much you purchased your property for.
How Replacement Value Is Calculated
Insurance providers calculate the replacement value of the home depending on several factors, which may include:
- Age of the home–if the home contains materials and details that will be more expensive to recreate at today’s prices
- Size of the home–the square footage and number of rooms (the larger, the more expensive)
- Interior features–cabinetry, fixtures, built-in appliances, premium flooring, smart home technology, solar systems, etc.
- Roof and foundation–the general makeup of the building, e.g. if it was built on concrete, raised off the ground, etc.
- Renovation and additions–major changes done throughout living on the property
- Location–whether your home is in a metropolitan area (more expensive) or in a suburban neighbourhood
- Labour–availability of skilled workers and average costs of labour in your location
Replacement Value and Homeowner Insurance
Insurance plans have set dwelling coverage limits which dictate how much you can get when you file a claim for damages. This value is determined by insurance providers using your home replacement value, which they calculate using their own tools.
In most cases, you’re required to insure your home for at least 80% of its replacement value. This ensures that you’ll get enough to rebuild or repair your home back to its original state (of course, this only applies if the damages were brought about by a covered event).
When shopping for homeowner insurance, it’s best to know your home’s replacement value and to understand how it can affect how much you can expect to pay for premiums each and how much you may receive when you file a claim. Estimates may differ per insurance provider, so it’s a good idea to see how your options compare to maximize the value of your homeowner insurance plan.