Like many of our Arizona homeowners insurance customers, you have probably wondered how to calculate the replacement costs of your home. When you buy a home policy, you will need to choose the maximum amount that your insurer will pay if you need to rebuild your house in case of a covered incident. If your home gets destroyed by a fire, windstorm, or other threat, you won’t be happy to find out you have inadequate dwelling coverage.
Why is Estimating Your Home’s Replacement Value Important?
Many people mistakenly think that replacement costs should equal the market or cash value of their home. Just knowing how much you might sell or buy a similar home for won’t tell you how much you need to rebuild the house that you have now.
Sadly, misunderstanding replacement value has lead to a lot of expensive mistakes. For example:
- CoreLogic, a large insurance analytics company, estimated that most U.S. homes have been underinsured by at least 20 percent.
- Even worse, some houses have been underinsured by at least 60 percent.
If you underinsure your house, you could either have to pay for the rest yourself or settle for much less than you had before. Why are so many homes underinsured? In some cases, homeowners may not have understood the difference between the replacement value and cash value of their house. In other cases, they may have estimated replacement costs correctly in the past but failed to account for inflation and other changes to rebuilding costs.
Understanding Actual Cash Value Vs. Replacement Costs
You can purchase policies that will pay to rebuild your house based upon either actual cash value or replacement cost. This briefly explains the difference between these two methods:
- Actual cash value: The insurer will subtract depreciation when calculating your insurance settlement. For instance, you may have to replace a roof that you installed ten years ago and has an estimated lifetime of 20 years. In this case, the insurer would only want to pay half of the replacement cost.
- Replacement value: Your policy will have a stated maximum replacement value of your home, but the insurer will not subtract anything for depreciation. Since you obviously expect your insurer to replace your old roof with a new roof, this is a more sensible way to purchase coverage.
Even the replacement value may not account for changes in rebuilding costs, inflation, or unexpected challenges. For instance, reconstructing your home may also require you to have damaged parts of your old home hauled away. A policy or rider that provides you with the guaranteed replacement value of your dwelling will offer you more security.
Most important, you need to understand that the cost to rebuild your house will almost never equal its market value or the price you paid for it. For one thing, market values include the property that the house sits upon, and your lot won’t be considered as part of rebuilding. Even so, rebuilding expenses may be greater or less than the price of a similar house in your area. That really depends upon lot prices, local rebuilding costs, and the condition of comparable houses.
How to Figure the Right Replacement Costs for Your House
Work with a qualified Anthem, AZ homeowners insurance agent to estimate local replacement costs for your house. An agent will make sure your policy conforms to your mortgage company requirements and accounts for the chance of inflation and unanticipated expenses. Have a policy that ensures you will receive a guaranteed replacement value will help protect your investment and give you peace of mind.