When searching for homeowners insurance coverage, you rely on the insurance company to insure your home for it’s full replacement value. When you purchase your home, you are paying for both the market value of the home (minus any negotiated compromises) and the land value.
Most people think that you should insure the home for the price you paid for it, or it’s market value. Other people think you should insure the home for how much you owe on your mortgage loan(s).
A homeowners insurance policy is meant to cover your home for it’s full REPLACEMENT COST TO REBUILD. This does not include the land value, because the insurance policy will not replace the land.
Insurance companies use a Replacement Cost Estimator to determine the home’s replacement cost to rebuild. Some factors that are part of the RCE are:
- The home’s square footage
- The age of the home and any renovations made
- The attachments of the home (attached garage, porches, decks, patios, etc.)
- The interior specifications, including wall material, floor materials, custom or builders grade kitchen / bathrooms, and other amenities of the home
- Exterior building materials, whether the home is brick, siding, log, etc.
- Heating, electric, plumbing materials
The Replacement Cost Estimator also includes the price for:
- Construction and agricultural equipment used to build the land and home
- Debris removal expense
- Labor costs
Companies have developed programs such as Marshall & Swift/Boeckh, which have detailed computations for each factor used to determine the price per square foot to rebuild a home.
Insurance companies rely on these programs to properly insure the full replacement cost to rebuild a home. Your insurance company also relies on the information provided on a home inspection to make sure that they have updated information about your home.
Please contact your insurance company or agent if you have made any renovations to your home that may increase the replacement cost to rebuild your home.
Source: Henry Murray Agency