Understanding Home Insurance Replacement Cost

One of the most difficult concepts to grasp when it comes to homeowners insurance is the value to insure your home.  How do the insurance companies come up with this value?  For example, you may wonder why your home’s market value is $200,000 but your policy insures the home for $300,000.  This is because home insurance replacement cost is completely different than market value.

Market Value vs. Replacement Cost

Currently, in Fishers, IN, the replacement cost of a home is likely to exceed the market value.  Before going any further, what is the difference between market value & replacement cost?

Market Value: This is the value of your home in the real estate market.  It is the value you can expect to pay for a home or the amount you can expect to receive if you are selling your home.

Replacement Cost: This is the limit of coverage you see on your homeowners insurance policy.  This is the cost it would cost to rebuild your home in the event of a covered total loss.

For insurance purposes, market value has no relevance as you would want to rebuild your home if it is destroyed by fire, tornado, or any other peril covered under a home policy.  For a list of perils that the standard (HO-3) home policy protects against vs. our recommended open perils policy (HO-5), click here.  Keep in mind, not all policies are the same!

Right now, most homes in Fishers and Hamilton County have an average market value hovering around $100/square foot.  On the other hand, the same homes may cost anywhere from $110-$150/square foot to rebuild.

This begs the question:

How is Home Insurance Replacement Cost Calculated?

Every insurance company has a home replacement cost estimator they use to determine the insured value of any given home.  To avoid paying out of pocket (besides your deductible, of course), it is critical that the replacement cost value of your home is calculated accurately. Some major factors that play into home insurance replacement cost are:

  • Year built
  • Number of stories
  • Square footage
  • Quality of construction
  • Home upgrades
  • Number of garages – attached or built in
  • Foundation type

Why Insure to Replacement Cost?

Quite simply, replacement cost coverage will make you whole again.  It will get your house rebuilt to the way it is prior to the claim.  Again, it is absolutely imperative to insure your home to its full replacement cost to keep your out of pocket expenses limited to only your deductible.

When you get a quote from our agency, Priority Risk Management, we will provide you with a copy of the replacement cost estimator we complete with the insurance company. Contact us today to get your home covered correctly!



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