Market value vs. Replacement cost

The High Cost of Rebuilding

   If I bought my home for $300,000, then why do I need to insure it for $350,000? This is a very common question. It is a question I couldn't answer before I got into the insurance industry. 
   The Market Value of your home is what it costs to buy your home. That would be the $300,000 in the above example. The Replacement Cost used to determine your insurance amount is what it costs to literally rebuild your home. That would be the $350,000.  The basic issue that drives the difference between these two, is that the price of building materials and services continue to rise, while the value of real estate continues to decline.
   Many factors will affect the price of rebuilding your home. 
*The price of building materials is one. Did you know that there is a tiny bug, the mountain pine beetle, that has chewed its way through 40 million acres of timber west of the Mississippi? This has caused a lumber shortage in many areas of our county. 
*Another factor is that often, specialized workers are needed to prevent further damage in the case of a partial rebuild. 
*Building codes may been updated since your home was built. That will cost more on a rebuild. 
*There is the debris removal after a claim as well.
*Labor costs will be higher because it is more efficient to hire several crews to work on several homes (as in when building an entire neighborhood) than it is to hire one crew to work on one home. 
  If you upgrade or renovate your home, be sure to let you your insurance agent know. This can affect your replacement cost, especially if you put in hardwood floors or update the kitchen or bathrooms. Many clients don't want to make that call because increasing the replacement cost will increase your insurance premium. But it is negligible in comparison to the out of pocket costs you will forfeit when you rebuild your home without enough coverage in place. 
   You should update the replacement cost on your home every 3-5 years. What it costs to replace your home today is not what it will cost to replace your home in 5 years. The cost of rebuild fluctuates as the cost of materials and services change.

Some insurance carriers offer Actual Cash Value policies. This covers what it would cost to replace your home minus the depreciation on your home. These policies will be cheaper, but  they will not pay out the entirety of rebuilding your home. You will be out the extra money, or will have to decide to make cut backs in the rebuild.

We always suggest replacement cost. It is a little bit more money in the short term. And we all think “it will never happen to me”, but it can happen to you. And when it does, you want the right amount of coverage to protect your home.

 Thanks for Reading!
Nancy Brockman   

As always, if you have questions or concerns about your Home, Auto or Commercial insurance, please call toll free 877-987-8683 or click:  http://www.wekeepuinsured.com/