Why is My Home Insurance Replacement Cost More Than Its Market Value?

Many homeowners are confused by the gap between their home’s market value and the replacement value on their homeowner’s insurance policy. As market values ​​decrease, these numbers become further apart from each other and many people ask themselves why the big difference. Your homeowner’s insurance is a contract to rebuild your home, not to buy you another one down the street.

While market values ​​seem to continue to decline, rebuilding costs are still rising. The cost of rebuilding your home is not the same as the sale price and lowering your policy limits could be a bad mistake. Reconstruction generally costs more than new construction because it involves removing debris and working around the landscaping. These are items that are not considered in new construction. The market value of your home is not a good indicator of the amount of insurance you should purchase.

How is the reconstruction cost calculated? Each insurance company may approach this a little differently. However, the basic principle is the same. The cost is calculated from information about your home. Square footage, number of bathrooms, exterior siding, among other factors, are all taken into account when this is calculated. It is important to estimate this as accurately as possible because many companies have a coinsurance clause. This is an insurance policy provision that states that a property must be insured for a certain percentage (usually 80%) of its value in order to collect the full amount of a claim.

There are ways to save money on your homeowner’s insurance without reducing your coverage amounts. Ask your insurance agent about money-saving discounts for protective devices such as deadbolts, sprinkler systems, and security systems. You may also consider increasing your deductibles. Insure multiple policies with one insurance provider. Many companies offer discounts for having your home and auto insurance with them.

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