When reviewing homeowners insurance quotes with our clients, we often get asked, "Why is my house insured for more (or less) than the market value?"

So, what's the deal? The answer: replacement cost.

Replacement Cost vs. Market Value
Your insurance policy is based on "replacement cost", which is the amount of money it would take to replace your damaged or destroyed home with the exact same or similar home in today's market, regardless of depreciation. Replacement cost estimates include labor costs, building permits, contractor costs and profit.

Replacement cost IS NOT:

1. The market value of your home.
2. The home's purchase price or cost of the land.
3. The outstanding amount on your mortgage loan.

Often times replacement cost is markedly different than the actual market value of a home. The market value is the price a property should bring in a competitive market and includes factors not contemplated in the replacement cost calculation. These other factors can include land value, the quality of the neighborhood, the quality of the schools, as well as the community where the home is located. Market value also fluctuates depending on the supply and demand of the real estate market.

Replacement Cost vs. New Construction Cost
Maybe you have a new construction home and are wondering why your replacement cost is different than what you paid to build your home (i.e. new construction cost)? Replacement cost is also different than new construction cost because often times site access is limited after a home is damaged, there are demolition costs, code updates, specialty contractors and other variables - all of which can make replacement cost higher than new construction costs.

How do I find out what the replacement cost is for my home?
Ever wonder why your insurance agent asks so many questions when working on an insurance quote? Questions like what is the style of your home, how many bathrooms, what are the types of finishes and so on? It's so we can provide that information to the multiple reputable insurance companies we have access to. Companies then use that information to determine the replacement cost value. Interesting fact: replacement cost value is based on LOCAL contractor rates and building materials costs specific to your zip code.

Note: The only time when your home may not be insured to its full replacement cost is if you've renewed your policy year over year and/or have made upgrades to your home that are not reflected on your policy. That's why it is so important to keep us updated on any upgrades or changes to your home. You can download our Account Review form here to alert of us of any changes.

Insurance can change people's live for the better.
No one thinks bad things will happen to them, but unfortunately, they do sometimes. While nothing can take away the frustration or sadness if your home were to burn down, having the right insurance coverage can provide the financial resources you need to rebuild and return back to normal. At Lakeside Insurance Brokers, our agents will help educate you on the options and coverages available to you. Call us today if you're considering purchasing a new home, made upgrades to your current home or just have questions on your current policy.