How much insurance do I need for my home?

And the answer is…It depends–

It is important to understand that there are two options for claim settlements on your home insurance policy.

Replacement Cost and Actual Cash Value

Replacement cost coverage ensures if there was ever to be a catastrophic loss, you would be able to replace everything in your home. This applies to the structure of your home as well as your personal belongings. If insurance agents were able to just pick a dollar amount for your home and say, “this is how much your home is worth”, few would hardly agree, and things would become very complicated and frustrating for all when disaster hits, thus the reason for replacement cost estimators.

In most cases, the replacement cost will be more than market/appraised value. In the case of new construction, it is important to realize that the builder utilizes bulk buying power to keep overhead and costs lower. A homeowner will not have that advantage.

For older homes, the location or condition of the property can drive the cost per square foot purchased below what any contractor can rebuild for.

Sometimes we do see the appraised value of the home far exceed our calculated replacement cost. In those instances, many times we simply need to back the value of the land out of the purchase price and get much closer to our estimated replacement cost. Land is not insurable and is not included in our insurance replacement cost formula.

Replacement cost calculations

According to the National Association of Home Builders, the average build price in 2015 was $103 per square foot. If your home is 2,100 square feet, you are looking at $216,300.

Here are some of the factors that go into replacement cost calculation:

  • Flooring: Hardwood or custom floors are much more expensive to replace than laminate or tile.
  • Cabinets, fixtures and appliances: If your kitchen is outdated, replacing it with a new one will be costly. Custom cabinets and built-ins could cost more too.
  • Replacing your roof: Depending on the materials and age of your roof, this can be a major expense.
  • Exterior features: High-end windows, stonework and siding can all add up. What about that outdoor kitchen you added last summer?
  • Personal Possessions: Your personal possessions can add up to a major part of your claim. Keeping a detailed inventory of your possessions will ensure that you are fairly and fully reimbursed for your furnishings. There are a number of apps available that can assist with your inventory.
  • Permitting and building codes: Permits are not free. They have to be obtained from your city or county and they do cost. Building codes may have changed since your home was first built. If they have, then it could be more costly to rebuild and bring the home up to code.

Here’s an example of replacement cost coverage: Ted’s living room was destroyed by fire (a covered peril on his home insurance policy. His 50 inch tv and all the furnishings he purchased in 2008 were destroyed, Because Ted has replacement cost coverage on his policy, he received enough money to go buy a new TV and furniture.

Actual cash value: Will pay the market value of the house and contents. (Think garage sale) Actual cash value is determined by taking the replacement cost of the items and subtracting the depreciation. Depreciation is the loss in value from all causes, including age, wear and tear.

Here’s an example of actual cash value coverage: Ted’s 50 inch television and living room furnishings that he purchased in 2008 was destroyed in a fire. Ted has an actual cash value policy so he only received what that 2008 TV and furnishings are worth in today’s market.

Another important thing to consider is do you have a mortgage on your home? If you do, then your lender will require you to have replacement cost coverage on your home as a condition of you loan. The purpose of a home insurance policy is to put your home back the way it was before the damage occurred. Replacement cost coverage protects the homeowner and the lender from a financial loss in the case of unexpected damage.

If you do not have a lender, then you can choose an actual cash value (ACV) policy. An actual cash value policy will only pay the market value of your home and contents, not what is would cost to rebuild or replace. This would apply to not only the building, but your personal property. This is not recommended as it would mean you could be out of pocket quite a bit of money in the event of a total loss.

Keep in mind that insurance companies have rules and regulations regarding their policies. If you have a replacement cost policy, then the dwelling amount must be within a certain percentage of the true replacement cost. If the dwelling amount is determined to be to low,  then your insurance company could potentially reduce or deny your claim.

Janet Simmers, Insurance Agent

Gibraltar Insurance Services – 281.720.8369 – janet.simmers@ghfs.net