Insurance 101: What is Replacement Cost Homeowners Coverage?
A recent survey found that most homeowners are seriously under-insured. Marshall & Swift, a leading insurance data services company, found that 66 percent of homeowners had inadequate coverage by an average of 18 percent. That works out to $36,000 for a typical $200,000 home. While few people would willingly choose a policy with a $36,000 deductible, that is the net result of being under-insured by that much on what may well be their most valuable asset.
Market Value vs. Replacement Cost
The market value of what your home would sell for today is very different from the amount of replacement cost coverage to properly insure the rebuilding of a home. Market value takes into consideration the land value, depreciation and other nearby market factors while the replacement cost simply reflects the cost to rebuild a home. These can be very different numbers.
For example, you can have a home that is worth $400,000 in one neighborhood while an identical home across town could have a market value of half that much, even assuming they were built on lots of equal size. But actually replacing those homes - rebuilding them in place using similar construction methods and materials - would essentially cost the same for both. Rebuilding costs can be higher or lower than market values, since factors like land value and depreciation don't affect rebuilding.
Sitting down with your agent to review the features of your home is very important, as homes with features such as crown molding, hardwood floors and tile cost more to rebuild. Other factors that are weighed are the quality of kitchens and bathrooms; for example, custom or luxury kitchens can add significantly to the rebuilding costs.
Separate structures, sometimes referred to as "other structures" or "Coverage B", refers to any structure that is on your property, but not attached to your main house. Examples of separate structures include:
- Detached garage
- Garden shed
- Detached in-law unit
- Retaining walls
- Swimming pool
- Outdoor kitchen
Most homeowner policies automatically include separate structures insurance that equals 10% of the amount of insurance on the main house. If the number and value of separate structures are significant, a separate valuation should be done for each to determine if extra coverage is needed.
Your homeowner's policy will automatically include personal property coverage. If you have a typical amount of personal property in your home, this should be adequate. Items such as jewelry, guns, coins, computers, business and high-risk property typically have policy sub-limits, some of which may be $1,000 or less. Such special items should be discussed with your agent, especially if you have them valued over $1,000. A homeowner's policy has many options to increase these personal property coverage amounts.
Know the Value Before a Catastrophe
Knowing the value is part of good financial planning and risk management. The worst thing you can do is deal with value after a claim, because at that point, it is too late. That is why it's best to address this now and let insurance serve its purpose and allow you to smoothly proceed with your life after a claim occurs.