Replacement Costs on a Homeowner’s Insurance Policy

Today I want to talk to you about how your home is valued on a homeowners insurance policy.

There are two main ways a dwelling on a homeowner’s policy is valued and that is actual cash value and replacement cost value. On this video today, we’re just going to talk about replacement costs. I will do actual cash value on another video.

What happens when your home is insured for replacement costs, the most popular method of insuring a home? If your house is lost, burns to the ground or damaged, your insurer is going to reimburse you, subject to your policy limits, for the costs of rebuilding or repairing your home based on the size and structure of the home that was lost or damaged.

Homeowners Insurance: How your home is valued

They’re going to cover the costs to rebuild your house from scratch reflecting today’s prices for; construction, labor and materials and they’re going to consider building codes and they may consider the location of your home, so this figure is typically higher than your home’s actual cash value or the market value.

I’m telling you this because, sometimes, someone will say to me, “Well my home is only appraised for $180,000, why is this dwelling being insured for $250,000?” The reason for that is, it almost always costs more to rebuild your house from scratch than the amount that you are going to sell your house for or its market value.

If you are a person who likes to have adequate or optimal coverage and you want to make sure you are fully covered on your homeowner’s insurance, make sure that you have your policy reviewed annually. Especially if you have an insurance policy that was written a few years ago when the cost of materials, labor and construction was a lot less than it is today due to inflation because you may not be adequately covered. It may cost $300,000 to rebuild your house three years ago, but right now, it may cost $450,000 which means you will end up coming out of pocket $150,000 and you don’t want to do that so make sure you have your policies reviewed annually.

There is however a couple of endorsements you can add to your policy to help you with that that is an inflation endorsement, and you can add extended replacement cost to most homeowners’ insurance policies so that will help cover where that that lack of coverage is if you have a total loss.

Visit “Value Peguin” for a list of definitions on popular homeowner’s insurance endorsements

According to Value Penguin:
Inflation Guard Endorsement: An inflation guard endorsement automatically periodically increases the coverage limit on a home to account for inflation. Although coverage increases over the course of a policy period, the resulting higher premium is not usually billed until time of renewal.

According to Progressive:
Extended replacement cost is an endorsement on your home insurance policy that extends your dwelling coverage by 10% to 50% of the cost to rebuild your home.


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