Are you preparing to purchase a new home and have questions regarding your homeowner’s insurance policy? If so, you are not alone. While purchasing a comprehensive home insurance policy may sound simple enough, there are many different factors to consider. And when you start to hear terms like “market value” and “replacement cost” thrown around, you may end up scratching your head. Luckily, with a bit of research and the guidance of our knowledgeable independent insurance agents, it really is easy to define these important terms and choose the best level of insurance coverage to fit your needs. Keep reading to learn more and discover the benefits of total insurance protection for your home.
What is the Difference Between Market Value and Replacement Cost?
You’re meeting with your insurance agent to discuss the best route to take when it comes to your homeowner’s insurance coverage, and they recommend insurance your home for $275, 000, but you know that it’s only valued at $120,000. Why would they make such a recommendation? One of the toughest questions you’ll face regarding home insurance is the amount of coverage you actually need to place on your home or dwelling.
When you buy a home, most mortgage companies will require that you purchase home insurance coverage before closing. Most home buyers simply assume that the amount of coverage for the actual dwelling should be equal to the amount that they paid for their new home. But in most cases, this would be an incorrect assumption. This is because there are different methods used to determine the value of a home.
To put it simply, when an insurance agent or realtor refers to the market value of your home, they are referencing the actual price that you paid for it. This is the amount that any other buyer would pay if they were going to purchase your home and land from you in its current condition. This number is influenced by a number of different factors including:
- The availability of similar homes in your area
- Local crime statistics
- Your proximity to good schools
- And more
Additionally, the land that your home sits on is also included in the market value, although it is not typically covered under your home insurance policy.
The replacement cost of your home is the price that it would take to rebuild your home in the same location, with the same quality of construction and at the same size when you consider today’s costs. This means that when you are shopping for insurance coverage, you need to take in the amount your insurer will need to reimburse you if your home is destroyed in an accident.
How to Determine Replacement Cost
There are a few different ways that you can go about determining your home’s replacement cost. You may want to outsource the job to a reputable local building contractor in the greater Mequon area or you can speak with your independent insurance agent directly to see what kind of estimator tools they utilize. But keep in mind that your estimation should only include the replacement cost of the dwelling and any associated fixtures, systems, and finishes. The land value is only included as part of your home’s market value.
Learn More from Leonard Insurance
Have questions about your home insurance coverage? If it’s time to find a more comprehensive homeowner’s insurance policy, we can help! Whether you’d like more information on the difference between market value and replacement cost or you’re interested in a free quote, give us a call at (262) 241-8610 or contact our friendly Wisconsin insurance agents online today.