Home insurance covers your house if it’s damaged or destroyed and you need to rebuild. You want to make sure you have enough replacement cost value coverage so that your insurance company would provide enough money to rebuild if your house is damaged by a fire or other problems covered by homeowners insurance.
Your home insurance company can figure out your home’s replacement cost value. You can also use an online replacement cost estimator to see how much you may need in replacement cost value.
What Is Replacement Cost Value?
A home’s replacement cost is how much coverage you would need to rebuild your current home. Factors that home insurance companies use to determine the replacement cost value include:
- Home size, including square footage and number of bedrooms and bathrooms
- A home’s features
- Local building costs, including materials and labor
- Local building codes
- Type of construction
- Home improvements
When figuring out replacement cost value, an insurance company may review local home insurance claims and policy databases to analyze local construction costs.
The replacement value doesn’t take into account wear and tear or depreciation. It’s strictly the cost of rebuilding your current house. Once a home insurer has estimated the replacement cost value, you use that amount for the dwelling coverage within a homeowners policy.
A replacement cost estimate should not include the value of the land, and it is not the same as the real estate market value if you were to sell your home.
Market value is not the same as replacement cost value. A home’s market value is connected to real estate sales and takes into account what your home and property are worth in the real estate market. Factors that may play into a home’s market value but not in your replacement cost value are things like land value and the quality of the school district.
Building costs and inflation fluctuate so it’s wise to reassess replacement cost coverage annually when you renew or change your policy. Insurance companies often automatically adjust dwelling limits based on the latest local building costs when you renew a home insurance policy.
EXPERT TIPS
How To Calculate the Replacement Cost of Your House
Les Masterson Insurance Editor,
Ask Your Insurance Company
Your insurance company can provide you with a replacement cost estimate. When you purchase home insurance, an insurer typically uses specialized software to estimate replacement cost to determine an appropriate dwelling coverage limit.
Michelle Megna Insurance Lead Editor,
Hire a Property Appraiser
You can hire an independent property appraiser to inspect your house interior and exterior and estimate how much it would cost to rebuild. Hiring an appraiser should give you an accurate estimate of your home’s replacement cost value, but you’ll have to pay for their services out of pocket.
Ashlee Valentine Insurance Editor,
Use an Online Replacement Cost Calculator
A quick way to figure out the replacement cost of a house is to use a home replacement cost estimator. Numerous free estimators are available. You’ll input specific information about the house, like the age, square footage and building and roof materials. Using those details, the calculator returns an estimate.
What Happens if Replacement Value Isn’t Enough to Rebuild Your Home?
If you need to rebuild but your homeowners policy doesn’t have enough dwelling coverage, you either have to make up the difference yourself or build a home that fits a smaller budget. That’s why replacement cost value is so important.
Let’s say your house is destroyed by fire. You have dwelling coverage of $400,000, but local building costs and inflation have pushed the rebuild cost well above that figure. You get estimates from builders but find it will cost at least $475,000 to rebuild.
In this case, you would either have to figure out a way to make up that difference or sacrifice aspects of your current home, such as building a smaller home, using cheaper materials or cutting corners elsewhere.
Types of Replacement Cost Value
A standard replacement cost value is the norm for home insurance policies but there are ways to go above your dwelling limit. Here’s a look at the types of replacement cost value coverage.
- Standard replacement cost: The policy covers up to the home’s dwelling coverage limit stated in the policy. In other words, a policy with $400,000 replacement cost value coverage would offer up to that amount to rebuild or repair your house. The insurer will pay to rebuild the home back to its original condition. If you have a policy with reproduction cost coverage, you must rebuild a home exactly the same, including the same layout and design. The building materials should also be the same or similar if you have reproduction coverage.
- Extended replacement cost: This extends your dwelling coverage by a certain percentage, such as 30%. That means if you have $400,000 dwelling coverage with 30% extended replacement cost coverage, it would cover up to $520,000 to rebuild your home. This coverage can help provide a coverage cushion if building costs increase in your area.
- Guaranteed replacement cost: This coverage goes a step further and guarantees that you will be reimbursed the full amount to rebuild your house regardless of building costs. This could be a good policy endorsement if you live in an area prone to large building cost increases, such as areas with severe weather. Not many insurers offer this level of coverage.
In addition to buying extended or guaranteed replacement cost coverage, it’s smart to add inflation adjustment coverage to your policy. This type of add-on automatically increases your dwelling coverage annually based on inflation.
More: Extended and Guaranteed Replacement Cost Coverage