The amount of dwelling coverage you need on a homeowners insurance policy is based on the replacement cost of your home. Understanding how this number is determined is critical to purchasing the right dwelling coverage amount for your home. If you purchase too little, it could mean significant out-of-pocket costs if your home is damaged or destroyed. The good news is that you do not have to calculate your dwelling coverage amount alone.
What is the replacement cost of a home?
The replacement cost of a home is the amount it would cost to rebuild your home using the same materials if there is damage or you need a complete rebuild. This cost is a combination of many factors, including construction costs, home features, the quality of materials used to build the home and the square footage. It is the amount it would take to rebuild the home from top to bottom, the way it was before being damaged or destroyed.
Another important thing to remember is the replacement cost does not equal the market value of your home. The market value is determined by what your home could sell for in the current market conditions. The market value also incorporates numerous other factors into the price, such as the value of land, local amenities and nearby schools.
Calculating the replacement cost of your home
Your dwelling coverage is fairly easy to calculate because property insurers have cost-estimator tools available to help determine the replacement cost of your home. Each property insurer may calculate a different amount, but these amounts should be relatively similar if you receive multiple quotes from different companies. You will need to provide your home’s characteristics to help determine your dwelling coverage amount. This can be done over the phone while speaking with a licensed insurance agent or online, as some homeowners carriers have an option to calculate this amount online when quoting a homeowners policy from their website.
If you need help determining the features of your home, there are methods to use to provide the right details of your property for your policy. You can:
- Hire a local appraiser or contractor who has experience in estimating replacement cost value for homes.
- Review your property inspection report to determine your home’s square footage and specialized features.
- Research your home online if the details are available through a previous real estate listing. However, keep in mind that some of these details may be inaccurate.
Several factors go into the estimating process to determine the replacement cost of your home, such as:
- Age of the home. The year your home was built is a big influence since there are different building standards based on the time period when your home was built. The age of your home can give insight into what type of exterior construction you have, such as solid brick or brick veneer, or even what type of electrical equipment your home has, such as knob and tube wiring or circuit breakers.
- Square footage. Naturally, the larger your home is, the more it will cost to replace or rebuild. The higher the square footage, the higher the replacement cost.
- Features. Features of your home include everything from the flooring materials, such as carpet, tile, hardwood, to the roof materials. Each of these characteristics affects the replacement cost, and the higher the quality of the materials used for the features, the higher the replacement cost.
- Fixtures. Like the features, the quality of the home fixtures is also used. Fixtures include items such as your countertops, cabinets and lighting. The higher quality fixtures mean an increase in replacement cost.
- House style. If your home design or home style is more complicated to rebuild or replace, it will likely increase the replacement cost.
- Foundation type. Property insurers want to know whether your home is on a slab, crawlspace or basement. If it’s on a basement, they will want to know if the basement is finished.
Once your dwelling coverage amount is determined, this becomes the Coverage A of your homeowners insurance policy. Multiple other policy coverage options on your homeowners policy will be affected by this amount. For example, your Coverage B, also known as other structures coverage, is usually 10% of your Coverage A amount and your Coverage C, also known as personal property coverage, is usually 50% – 75% of your Coverage A.
Dwelling insurance at actual cash value or replacement cost value
Insuring your dwelling for actual cash value (ACV) or replacement cost value (RCV) also affects the cost of homeowners insurance. Many homeowners policies do not automatically add RCV, so you might have to decide between ACV and RCV. ACV is cheaper because it uses the depreciated cost to repair your home. It may be tempting to choose ACV for budget purposes, but you will likely have higher out-of-pocket costs if you do have property damage or need a complete rebuild.
Types of replacement cost policies
It’s important to realize the replacement cost coverage uses an estimate, and is not a guarantee that the calculated amount will fully cover a total loss of your dwelling. To further offset your financial risk, a homeowners insurance company usually offers replacement cost policies and extended dwelling coverage. You will then need to decide which option is best for your budget and preferences.
- Standard replacement cost: The typical homeowners insurance policy will include standard replacement cost and it offers the most basic financial protection. It will pay to repair or rebuild your home without any depreciation factored in.
- Extended replacement cost: To add additional protection against rising costs, you can choose the extended replacement cost option. It increases your home’s Coverage A value by a certain percentage above your dwelling limit. Most policies offer a 25% or 50% option. So, if your dwelling limit is $200,000, a 25% option would insure the rebuild cost of up to $250,000 instead.
- Guaranteed replacement cost: This coverage will reimburse you no matter what the building cost may be for replacement or a total rebuild. While it might be the most expensive option, it will offer the greatest protection against depreciation or rising construction costs. If you are interested in this option, be sure to check its availability in your state or with the insurance carrier, since it’s not offered everywhere.
Frequently asked questions
How do I calculate the replacement cost value of my home?
The easiest method for a quick calculation is to multiply the square footage of your home by the average cost per square foot to build in your area. This will give you a general estimate only. A more accurate estimate would involve the help of an appraiser, contractor or a licensed insurance agent who will use a replacement cost calculator when quoting a homeowners insurance policy.
How much will a homeowners insurance policy cost?
The average cost of homeowners insurance in the U.S. is $1,312 per year for $250,000 in dwelling coverage. But this cost varies depending on a variety of reasons, including your ZIP code, coverage options selected, age of the home and the characteristics of your home.
How much homeowners insurance should I purchase?
Each homeowner has their own needs for insurance. To determine how much to purchase, it is best to speak with a licensed insurance agent or quote your property insurance policy online. You can also compare multiple insurance carriers to help determine which options are offered by each company. While most companies will calculate a similar dwelling coverage amount for your home, coverage options and endorsements may vary.