When you purchase a homeowners insurance policy, you’ll see plans that will agree to cover the replacement cost or the market value of home, condo, or other living space. For many homeowners, this can be difficult. In fact, some homeowners don’t even know the difference!
It’s important to know what you’re buying when purchasing home insurance, so let’s take a moment to explain what house market value and replacement value mean. We’ll even throw in the benefits and risks of each one to help you determine which method is the best for your homeowners insurance needs.
What Does Market Value Mean?
To put it plainly, the market value is the amount a buyer would pay to purchase your home and land property in its current condition. While the land itself isn’t covered in most homeowners policies, its worth would be included in the home market value.
If you have an ornate home that has artisanal woodwork/masonry or is made of expensive materials, rebuilding your home to its original condition could be higher than the purchase price of the home and the land it stands on. If that’s the case, you’d likely pay lower premiums for the insurance market value of your home rather than with a replacement policy. If you aren’t flushed with cash, it is practical to purchase a policy based on the property’s value vs. price of repairs and restoration if disaster strikes.
More than likely, you’ll risk getting incomplete coverage if you choose to go with market value. In most cases, the cost of rebuilding a home after a fire or disaster is more than the actual cash value of the home or property that was established when you purchase the policy. This means that you would have to make up the difference in cost or build a less expensive home. It is best that you get your home professionally appraised, as its value can fluctuate over time and you can update your policy accordingly. Unless your home is incredibly specialized or is on a highly valued piece of land, purchasing a plan based on market value isn’t recommended.
What Does Replacement Cost Mean?
If you insure your home under replacement cost, your insurance will cover the repairs, replacement, and rebuilding of your home based on its size and structure. It bases your payout on appraisal and estimates of the current cost of repair/replacement rather than the market value of your home and land.
If you do end up having your home lost and destroyed in an incident, replacement cost helps you get your home back, basically. Your house and quality of life would essentially return as if the covered event never took place. With that said, experts recommend that you insure your home in at least 100% of its estimated replacement cost if you were to have this implemented to your policy.
Replacement costs can change over time, so you may need to get your home re-evaluated and your policy updated every couple of years to make sure you get enough coverage. Some homeowners plans offer an inflation clause that helps keep you covered, but it is still in your best interest to keep informed about the market conditions of your area. Because labor costs, building materials, and other factors rise over time, you may have to pay more into your premium than you do when you first initiated the policy.
Seeing how the market value/replacement cost offers of a homeowners insurance policy works can help determine what homeowners plan fits best for you. Freeway Insurance can provide a variety of quality homeowners insurance plans that can fulfill your needs and your budget. Call us or get a free homeowners insurance quote online today.