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Ensuring that your home insurance policy sufficiently covers your home is important, and can start with understanding both dwelling coverage and how your policy calculates replacement cost. Dwelling coverage is what would rebuild or repair your home due to a covered loss, and for this reason, can be the most critical part of your home insurance policy.
But when it comes to determining how much dwelling coverage you need, you’ll also need to understand replacement cost. This is the cost related to rebuilding your home, and it is typically imperative that you choose a dwelling coverage amount that properly insures your home.
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
While calculating the replacement cost of your home might seem intimidating, there are many resources available to help you. A good place to start may be to request an estimate from a local contractor or review your property inspection report.
It may also benefit you to work directly with a licensed insurance agent. Local agents may be familiar with the area and have a better idea of the associated costs of construction, but many insurance companies will also use a replacement cost estimator to calculate this amount. In general, the characteristics of your home, listed below, will have the greatest impact on your home’s replacement cost:
- 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
The dwelling coverage of an insurance policy can be calculated at either the actual cash value (ACV) or replacement cost value (RCV). The difference between ACV and RCV is how each one takes depreciation into account.
ACV will replace items at their current market value, factoring in depreciation, while RCV will replace items with their brand new versions without taking into account depreciation. Your home insurance policy will specify whether certain coverage are calculated at ACV or RCV, what adjustments are possible and the associated cost.
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.