Market Value Vs Replacement Cost

Many of our customers wonder why we set homeowners’ and rental properties’ dwelling coverage at what we call “replacement cost”.  Many ask why we can’t just put it at the market value or the price they paid for the home.  We do our best to explain when these questions arise, and we hope this blog will help explain to the people who think these questions, but don’t ask.

Market values fluctuate.  We all know that.  Housing bubbles burst, and sometimes your home is valued much less than you paid for.  On the other hand, purchase price also fluctuates.  Maybe you got a great deal because the previous owner just needed to get out of a mortgage.  In that scenario, things are working out great for you, but your home is still worth more than that.

Replacement cost is, quite simply, the cost it would be to replace your home in the case of a total loss.  This is what we do in insurance.  We are there for the catastrophes, and it is our duty to be sure that you are able to rebuild and have everything like it was before.  Replacement cost factors in materials, labor, time, inflation—everything it takes to rebuild your home.  So while you got a great deal buying your new home at $200,000, if it is going to take $250,000 to rebuild, that is what we want to insure you for.

Market ValueWe know insurance can be a pain to understand.  That’s why you want an agent who can guide you through the mess of information to be sure that you are covered properly.  That’s why we don’t get tired of answering this question.  We want everyone to be insured at replacement cost in case the unthinkable happens.  We want you to have the peace of mind that you are covered.