How does my insurance company determine the replacement value of my home?
You purchased your home for $275,000, but your insurance covers you for $238,000. Or it could be that your purchased your home for $500,000 but your insurance covers you for $700,000. Why is this?
When you buy a home it is based upon the market value. Factors such as supply and demand in certain areas can inflate or deflate the purchase price. With insurance, the company is concerned with how much it would cost to rebuild your home.
How do the companies determine what the replacement value is for the home?
For most homes, companies use an industry standard valuation tool. The companies then tweak this information based upon their loss history/experience. Your agent will complete the profile that ultimately determines the replacement value. At a high level, the tool uses square footage, year built and construction type. But there are several other factors that are used to finish the replacement cost.
If pictures and information are not online, your agent may reach out to you for details on the home. Questions will be about cabinetry, flooring, special features such as cathedral ceilings.
Every homeowner should ask for a copy of the replacement cost report to review. If you find discrepancies, let your agent know.
A few key things to remember:
1) It generally costs more to rebuild the home. That is because most builders buy in quantity to reduce their costs.
2) Before you can rebuild your home, you will first need to remove the debris left by your original home.
3) Play it safe. Insurance companies offer coverage that will extend the replacement value of your home. Most companies offer an additional 25% or 50%. Example: Your home is insured for $400,000. By adding the 25% extended dwelling replacement, you will now have up to $500,000 to rebuild your home.