Understanding the value your home is insured for and how that number is determined is one of the smartest things you can do when making an informed choice to protect what is most likely your largest asset. A common misconception is that the value your home is insured for is the same as the purchase price or even the value your home is worth. The latter numbers are referred to as market value, while home insurance policies are primarily concerned with replacement cost. The value you see on your homeowner’s policy is the estimated replacement cost amount.
In this article, we’ll talk about the difference between replacement cost and market value so you can have a better understanding of what goes into making sure your home is insured appropriately.
What is replacement cost?
Replacement cost is the amount it would take to repair, replace, or rebuild your home at current prices of construction materials and labor. When you insure your home for its estimated replacement cost, you help to ensure you have the coverage you need to repair or rebuild if it is damaged by a covered loss.
What is market value?
Market value is the amount your home is worth on the housing market. Think appraised value or the amount you are assessed for tax purposes.
Why is the coverage limit of my home higher or lower than the home’s market value?
Your home insurance amounts are based on its estimated replacement cost, or the cost to rebuild, and not the amount it would sell for on the housing market. The two are sometimes close but are rarely the same.
The infographic from one of our insurance carrier partners does a great job helping to explain the difference between the two values:
At Flury-Hinderks Insurance, we are helping our customers navigate a changing economy. In a time of significant rate increases in the homeowner’s insurance marketplace, we can help you make sure you are getting the best value for your premium.
Connect with us for an insurance portfolio review today.
