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Replacement Cost versus Market Value and Why It Matters

By November 1, 2018Insurance Tips

This question is very common in the insurance industry: why is the replacement cost of my home so different than the market value? Understanding the difference is an important step to being sure that one of your largest assets is properly covered.

What is Market Value?

Market value is the amount that your property and land would be sold at in its current condition.

Typically, market value is calculated by considering the price it would sell for in an open market. This includes factors such as proximity to a good school system, local crime statistics, and the value of the land itself. If you would like to see an estimate of what your home is worth, you can check your Zestimate online.

What is Replacement Cost?

Replacement cost is the cost to replace, rebuild, or repair your home with like kind and quality of materials. This value can include the cost to remove debris after a loss. This value is commonly used as the dwelling coverage for your homeowners insurance policy.

Replacement cost calculations are generally determined with a residential reconstruction cost calculator. The two most common estimators are e2Value® and Marshall & Swift®. These valuation calculators consider many factors of the construction of your home. Contrary to market value, land is not included in the replacement cost or dwelling coverage.

Common factors include the year your home was built, foundation, and number of kitchens and bathrooms. Other considerations are the quality of the materials used to build the home and the features inside of it. Depending on the customized features and replacement cost value of your home, your insurance carrier may perform an interior and/or exterior inspection to ensure that it is properly insured to its value. Typically, insurance carriers do not perform an interior inspection of your home unless your replacement cost coverage exceeds $500,000 or $1,000,000.

Why can’t I insure my home at market value?

The market value of your home can be significantly different than the cost it would take to reconstruct your home. Imagine your home is insured to its market value of $250,000. The actual reconstruction cost of your home is $350,000. You would be underinsured by $100,000 if a fire destroyed your home. The intention of insurance is to make you whole again after a covered loss and the solution is ensuring that your home is insured to its accurate replacement cost.

Construction costs have increased over the last few years due to improved technologies, increased spending, and increased safety measures. As a result, this directly impacts the cost it takes to rebuild homes after a loss.

If it has been several years since you reevaluated the dwelling coverage on your home, please send us an email. We would be happy to review the features of your home to ensure that you are properly covered.

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