Just because your home is insured for $100,000 doesn’t mean you will be paid that should it be destroyed.
In order to avoid a claim payment penalty, most homeowners insurance policies require coverage to be at least 80% of replacement cost. Do not confuse replacement cost with market value as these two can vary widely. Replacement cost is the expense to repair or replace your home. Market value represents a fair selling price and takes into consideration factors such as condition, location, and the local real estate market.
If underinsured, claim payments will be reduced proportionally. For example, assume a home is insured for $100,000 and is completely destroyed by fire. If, after the fire, it is determined the cost to replace the home will be $200,000, then it was insured for only half of replacement cost. Thus claim payments will be approximately half of the insured value, or only $50,000. This simplified example illustrates the importance of insuring for the replacement cost of a home since this homeowner would be paid only $50,000 for a destroyed home that costs $200,000 to replace.
The best way to know your home’s replacement cost is to ask a contractor. We generally advise a minimum of $100 per square foot for a basic home. If you have hardwood floors, custom counters, and other upgrades, $150 or $200 per square foot is more reasonable. Specialty homes or homes in areas with high cost of building materials can be $250 per square foot or more. Get the point? Construction values in your area will vary.
Questions? Give us a call. We can provide replacement cost estimating tools to help you determine a reasonable value. Each of our clients is assigned a personal agent in our office. We do not operate a call center. If you would like a quote, visit homeowners insuranceopens in a new window. Old, new, town, country, waterfront – we do it all.