Replacement Cost vs. Market Value

How many times have you looked at your Homeowner's policy and thought that the coverage on your house was way too high? And that you could never sell your house for that amount.

With the housing market being what it is, people think that the coverage on their homes should reflect the market value -- but you couldn't be more wrong. The difference between market value and replacement cost is that market value reflects what a home can be sold for but replacement cost is what a home can be re-built for. Do you see the difference?

With the cost of services and materials, you want to make sure that you have enough coverage to rebuild your home in case of a loss. Some may say that they would never rebuild their house the way it is now, but let's consider the problems with that theory if you have a loss and the home is not completely destroyed. For example, say your home is insured for $160,000 but it should be insured for $200,000 and you have a kitchen fire that resulted in $50,000 worth of damage. The fact is, the insurance company will only pay you $40,000, less your deductible. That means that you’ll have to write a check for that remaining $10,000 in order to get your kitchen back in working order.   

The reason behind this is in the numbers.  Because you have only insured your home for 80% of its value, you will only receive payment for 80% of the loss.  If you have questions about replacement cost, contact your insurance agent.