Value Replacement Cost vs. Market Value

insurance-to-value replacement cost. Picture of man holding a small house with paperwork in front of him.

Today, we’ll discuss insurance-to-value replacement cost vs. market value.  Every homeowner needs home insurance.

But, this type of insurance can be confusing and leave you asking questions. With defining terms such as insurance-to-value replacement cost, reconstruction cost, and market value, homeowners might be comparing these definitions to the current market value of their homes. The numbers can vary greatly. You may have concerns and want to talk to your insurance agent. Here are some frequently asked questions we hear about homeowners’ insurance policies.

What is Insurance-to-Value Replacement Cost?

Replacement cost refers to how much it would cost to rebuild or replace your home if it happens to be destroyed (think of devastation from a fire, hurricane, tornado, and so on). The replacement cost deals with the costs to reconstruct a home, using building materials and skilled labor of similar or equal quality to the original structure — at today’s current prices.

Keep in mind that supply and demand for building materials could change. If they do change, these costs may higher at the time you need them. Therefore, the amount assigned to the replacement cost may be different than what you think the replacement cost should be. Replacement cost is also known as “reconstruction cost”. It may be helpful to think about this amount as “reconstruction”.

Replacement cost calculations can differ depending on the insurance carrier. The location and condition of your home are factors, too. Remember, each step in the reconstruction process has a cost.

Replacement cost calculations typically cover:
• Architectural plans
• Building permits
• Cost of labor
• Cost of raw materials
• Rush orders
• Other fees
• Taxes on materials

Costs for these items at the time of your appraisal will affect your replacement cost value. Land value is not included in replacement cost value, as it isn’t part of the cost of rebuilding a structure (home, garage, etc.).


What is Market Value?

Market value refers to the price a property would sell for in the current marketplace in its present condition.

Additionally, market value is related to the comparable property sold in your neighborhood within the same time frame. Market value is challenging to predict — value can fluctuate.

Calculations can be based on:
• The home’s location
• Supply and demand in your area
• Home features and characteristics

If you are planning on selling your home, you will need to know the market value for appropriate pricing. You can conduct your research. Real estate listings can give you a good idea of current prices for your area.

Therefore, a professional appraiser should appraise your home for value before you list your property.


Should I Insure My Home Based on Market Value?

It’s not a good idea. Your home’s current market value might not cover the cost of rebuilding if your home is involved in a disaster. Skilled labor and building materials may cost more now. Think about the build date of your home. As time passes, costs increase.

Plus, your home could have special features or unique architectural details. Your home could be considered a custom home or luxury property. These extras may be more expensive to replace. As time passes, it may be more difficult for builders to find the exact replacements for your home’s exclusive extras. Because of these and other factors, the market value of your home may often not have a direct relationship to the replacement cost and leave you improperly insured.


Home Insurance Policy Concerns Insurance Agents Hear Regarding Insurance-to-Value Replacement Cost

Replacement cost is a common topic. We hear quite frequently about the proper amount that insureds think should be used for the insurance policy. We understand. Typically, most insurers do not want to insure their home for more than the price they originally paid.

But, you must remember that if a disaster struck your home today, your insurance needs to reflect the replacement cost at today’s prices.  Otherwise, you could be underinsured and leave yourself open to unnecessary risk.

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If you have any questions about your coverage, or to review your policy limits, please contact us. For helpful tips on other popular topics, check out our articles on Cyber Insurance, Winter Home Protection, and Ransomware Developments.

As always, we are here to help you, your employees, and your business with all your insurance needs — from commercial insurance to group benefits to personal insurance. Thank you for allowing Mason-McBride to serve you!

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