If you've ever bought a home that needs Homeowners insurance, you may know that the amount you paid for the home and the amount of your basic coverage for the home, without your belongings, are not the same.
This is because you bought your home at market value, but the insurance company used replacement cost value to figure out how much it would cost to rebuild it. So, what's the difference between the market value and the cost to replace something?
Market value is just the price you paid for your home. Because the real estate investment market can change so much, most insurance companies don't give market value a second thought.
If you look at a property in your area that sold in 2003 for $100,000, it may have sold for $130,000 just three years later in 2006. This has to do with how many people want to live in the area and how the prices of homes are going up, but it has nothing to do with how much it would cost to rebuild the house.
Insurance companies for homeowners always look at how much it would cost to rebuild the same house in the same place for a certain year. This is what the term "replacement cost" means. So, if you buy homeowners insurance in a place where the market is crazy and people are paying triple or double the home's building value, your actual replacement cost and insurance coverage may be less than the home's market value.
If you live in an area where the market isn't doing so well that year, what you paid for your home might be less than what it would cost to replace it that year. This is important to remember when calling the insurance company, as many customers are confused or even angry by the different prices that insurance companies want to charge for coverage.
When getting estimates from the insurance company, keep in mind that they may give you both replacement value insurance coverage costs and market value insurance coverage costs. However, it is always best to take the replacement value insurance coverage since this is what will be needed to replace your home in the long run. You should also keep in mind that the value of the land should not be added to the replacement cost, so don't let an insurance agent tell you otherwise.
Before you talk to an insurance agent, be sure to write down the square footage of your home and each room, as well as any special features, like wood floors, marble or granite countertops, porches, decks, sunrooms, or basements.
The insurance company will also want to know about the major appliances that come with the house, as well as the basics of the plumbing, electrical, and air conditioning and heating systems. This can help them figure out how much it will cost to replace these things during the current year of your Homeowners insurance policy, so you won't be left in the dark.
