For those who have ever purchased a home, which requires homeowners insurance, you may realize that there is a difference between the amount you paid for the home and the actual amount of basic home coverage, excluding the items.
This is simply because you are paying the market value of your home while insurance companies use replacement cost values to estimate the cost of rebuilding your home. So what exactly is the difference between market value and replacement cost?
Market value is simply the price you pay for your home and insurance agents often do not give market value as a second consideration because the real estate investment market can fluctuate a lot.
If you look at a 2003 property in your area, it probably sold for $100,000, but just three years later in 2006, it sold for $130,000. This has to do with the demand for homes in the area and the rising cost of real estate, but it has nothing to do with the cost of rebuilding the home.
Homeowners insurance companies will always consider the cost of rebuilding the exact same home in the same location for any given year. This is the true definition of word replacement cost. Therefore, if you purchase homeowners insurance in an area where the market is on the roof and the homeowner pays triple or twice the value of building the house, your actual replacement costs and insurance coverage may be less than the market value of the home.
If you live in an area where the market isn’t that big during a given year, what you paid for your home may be less than your actual home replacement cost for that year. It’s important to keep in mind when contacting insurance companies, as many customers are confused or even angry about the difference in rates insurance companies are willing to charge for coverage.
Keep in mind when receiving estimates from insurance companies that many of them may provide you with replacement value insurance coverage in addition to the costs of market value insurance coverage, but it’s always better to get replacement value insurance coverage because that’s what you’ll need to replace your home in the long run. You also want to keep in mind that land values should not be included in the replacement cost assessment, so don’t let insurance agents suggest otherwise.
Before speaking to the insurance agent, be sure to properly document the area of the home and each room, and any special amenities in the home including hardwood floors, marble and granite worktops, porches, decks, or sunrooms, and basements.
Insurers will also want to know the major equipment that comes with buying a home, as well as the basics of the plumbing system, electrical system, and installed HVAC/heating unit. This can help them assess the cost of replacing these items during the current year of your homeowner’s insurance policy, so you won’t be left in the dark!
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