Find Cheap Homeowners Insurance Quotes in Your Area
When shopping for a homeowners insurance policy, the main decision you'll need to make is how much coverage you want to purchase for your dwelling. We recommend you purchase enough coverage to cover the costs to rebuild your house, also called its replacement cost. Estimating replacement cost can be done with house value calculators, a professional appraisal or even by your own computation. Purchasing dwelling coverage at a level sufficient enough to completely rebuild your home will ensure you are completely covered by your home insurer in the unfortunate event of a total loss, in which your home is completely destroyed.
What is Replacement Cost?
Replacement cost is the estimate of the price of rebuilding a new home that is of like and kind quality to your old home. Replacement cost will depend upon a variety of factors, including construction costs, square footage, the quality of materials used to build the home and home features.
It's important to understand that replacement cost of your home is not the same as the market value of your home. The market value of your home is the selling price of your home. But this number incorporates more than just the value of the home itself. It includes the value of the land it's built upon, any improvements made to the land itself and transactional sales costs, such as the profit made on selling the property. The cost of building the home, the replacement cost, is just one factor contributing to the market value of a home.
Why is Knowing the Replacement Value of Your House Important for Homeowners Insurance?
When you're buying homeowners insurance, the main coverage feature you're looking for is dwelling coverage, or Coverage A. Knowing the replacement cost of your home is important because it will help you select appropriate limits for your dwelling coverage, increasing the likelihood you'll receive sufficient reimbursement from your insurer to rebuild your home if you make a claim.
For example, say your home has a replacement cost value of $150,000, but you selected a Coverage A limit of $120,000 on your homeowners insurance policy. If your home is destroyed by a covered event—such as a fire or a windstorm—your insurer will only cover your dwelling up to your selected limit. That means you'll have to cover the remaining $30,000 of rebuilding costs to your home out of your own pocket.
If your home is completely destroyed, the difference between the cost to rebuild your home and your home insurance dwelling limit is what you'll pay out of pocket.
Home insurance dwelling limit
Out of pocket costs
You can't be sure your homeowners insurance fully covers you unless your limits are set at or above the replacement cost of your home. If your policy limits are not high enough to cover you in the event of a total loss, you're underinsured. However, homeowners should also know that the cost to build a home is not fixed, and even an accurate assessment of replacement cost at one time may not hold true in the future.
About two in every three homes in the country are underinsured, according to Nationwide. Determining your home's replacement cost is an important step toward increasing the chances your home insurance provides adequate coverage. In addition, it can greatly affect the price of your policy. Your dwelling coverage limit is one of the main factors affecting the cost of homeowners insurance.
Replacement Cost Calculations Are Not a Guarantee
Homeowners should seek the best estimate possible of the cost to rebuild their home, but they should also realize that there is no guarantee it will ultimately be accurate. For example, if a devastating hurricane drives up construction costs for everyone in your region, the cost to rebuild a home may be far higher than an initial estimate based on current labor costs and construction material prices.
On the other hand, home insurance companies often do offer policyholders options to expand their protection and create a buffer against rising costs. Two of those options are extended or guaranteed replacement cost policies, both of which are more expensive than a typical replacement cost policy.
An extended replacement cost policy will cover you up to a certain percentage above your dwelling limit. For example, if you have a 25% extended replacement cost policy with $200,000 in dwelling coverage, your insurer will cover you for rebuilding costs up to $250,000, or 25% more than $200,000.
A guaranteed replacement cost policy will reimburse you in full to rebuild your home, no matter the cost. This is the safest option, and the one with the highest premiums, but it may not be available in all states and is not offered by all insurers.
Actual Cash Value Versus Replacement Cost Value
It's important to be aware that not all home insurance policies will value your home at replacement cost value (RCV). When you buy a policy, you'll generally have the option to choose between RCV and actual cash value (ACV). Whereas RCV policies will reimburse you to rebuild a home of similar quality in today's market, ACV policies account for depreciation and wear and tear.
Consider a simplified example. Imagine your home cost $200,000 to build at the time of purchase, and the materials used to construct it have a lifespan of approximately 50 years. After 25 years, the dwelling is considered halfway through its lifespan, and its materials have depreciated to half their original value. In the event of a total loss of your home, your insurer would reimburse you for $100,000, half the original value. ACV policies are cheaper but will leave you with higher out-of-pocket costs in the event your home or property is damaged or destroyed.
While RCV coverage is more expensive, it will give you the security of knowing you'll be fully reimbursed for damage to your home, up to your policy limits. The exceptions to this rule are policies that do not reach an 80% insured-to-value threshold. This threshold—common among home insurance policies—requires your dwelling coverage limits to be at least 80% of your home's replacement cost. If they're not, you won't be guaranteed full reimbursement for damages to your home.
For example, suppose your home has a replacement cost of $200,000. In this scenario, your insured-to-value threshold would be 80% of $200,000, or $160,000. If you pick dwelling limits of $160,000 or above, you'll be fully covered for any claim you make to your insurer below that number. So $50,000 in fire damage would be paid in full by your home insurance company.
How insurance covers you if you're at or above the 80% threshold
|Dwelling limits||$160,000 (at the 80% threshold)|
|Fire damage cost||$50,000|
|Insurer reimbursement||$50,000 in full (minus your deductible)|
However, if your dwelling limit is below the 80% of insured-to-value threshold, your insurer will pay for damage at the same ratio as your chosen limits to the threshold. In the same scenario, if you pick dwelling limits of $120,000, you are covered for 75% of the $160,000 threshold. Now, your homeowners insurance policy will only cover 75% of the $50,000 in fire damage, or $37,500.
How insurance covers you if you're below the 80% threshold
|Dwelling limits||$120,000 (only 75% of the threshold)|
|Fire damage cost||$50,000|
|Insurer reimbursement||$37,500 (only 75% of fire damage costs, minus your deductible)|
If homeowners don't want to pick policy limits as high as the replacement value of their home, they should still make sure limits are at least 80% of the replacement value.
How to Calculate the Replacement Cost of Your Home
There are a variety of ways to calculate how much it costs to rebuild a house, and obtaining more accurate estimates will require greater effort by you, the homeowner. But considering the need to appropriately value a house for insurance purposes, every home insurance shopper should use at least one of these resources to obtain an accurate home insurance replacement cost.
Methods to calculate replacement cost
- Obtaining an insurer appraisal
- Obtaining an estimate from an online replacement cost calculator
- Hiring a professional appraiser
- Doing the math yourself
Given the importance of an accurate replacement cost value in setting your home insurance limits, we recommend not relying solely on insurer estimates of your home's replacement value. Incorporating an alternate approach and obtaining a third-party—or your own—estimate of your home's value will increase your confidence that you've selected the correct dwelling coverage limits.
Obtaining an Insurer Appraisal
An insurer often uses its own proprietary technology—or third-party technology—to estimate the replacement cost of homes it insures. For example, if you get a homeowners insurance quote from State Farm, it will use a replacement cost estimator for home insurance calculated by 360Value, a tool created by Verisk Analytics.
This method is probably the easiest way to estimate the replacement cost of your home, but it won't be reliable as an in-person appraisal. These analytical tools calculate your replacement cost based on inputs entered by you and by construction costs sourced by the creator of the tool. If you do plan to rely on an insurer estimate, be sure to compare estimates of multiple insurers before committing to a replacement cost value.
Obtaining an Estimate from an Online Replacement Cost Calculator
There are several independent companies offering replacement cost estimates online, but any one estimate shouldn't be trusted any more than an insurance company appraisal.
These replacement cost estimators are available for free or for a one-time price or subscription fee. Examples of websites offering home replacement value calculators include the Craftsman Building Cost Calculator and BlueHammer Home Report.
Users should know that an independent dwelling cost estimator may not necessarily be more accurate than an insurer's tool, as the calculator will use similar questions and rely on the accuracy of user inputs to make an estimate. And like an insurer calculation, it will rely on data sourced by the creator of the tool that is not guaranteed to be an accurate reflection of construction costs in your location. However, it will provide a third-party assessment of your home's replacement value that you can compare to the estimate provided by your insurer, giving you another comparison point for making an informed decision.
Hiring a Professional Appraiser
The most costly option—but also the one most likely to yield accurate results—is to hire a professional appraiser. A professional appraiser can provide a qualified opinion on the replacement cost of your home and is licensed or certified based on state standards.
A professional appraiser will examine all the factors inputted into a replacement cost calculator but will collect the data through an in-person inspection, adding an extra degree of thoroughness and detail to the process. However, you will pay an added fee in exchange for this increased scrutiny. Professional appraisal prices can vary widely depending on where you live but are generally in the order of several hundred dollars.
Doing the Math Yourself
The final option—and the most involved in terms of personal time investment—is to estimate replacement cost yourself. In this instance, you'll be trading your own labor for a free home replacement cost calculation.
However, this method risks an estimate that is far less accurate than those of professionals. Doing the math yourself requires you to estimate the cost per square foot of your home based on local construction costs and to factor in the cost of a variety of other home features such as your roof, flooring, fixtures, siding material and more. This process may require sourcing pricing from a variety of vendors such as roofing companies, who will have a qualified assessment on what parts of your home will cost.
Calculating replacement cost by yourself is a free and educational exercise, but we would recommend getting some form of formal appraisal too, whether it's through an online calculator or a professional appraiser in person.
What Factors Affect the Replacement Cost Value of Your Home?
A variety of factors contribute to the replacement cost value of your home. To generalize, these factors fall under five categorizations: age, square footage, house shape and style, features and finishes and home fixtures. Whether you're using an online replacement cost estimator or figuring it out yourself, you'll have to incorporate all these factors into your replacement cost calculation.
Contribution to replacement cost
|Age||Different time periods have different standards and techniques for home building. The age of your home reflects these standards and can affect your replacement cost in a variety of ways.|
|Square footage||Bigger homes cost more to rebuild, all else equal. The larger your home, the higher its replacement cost is likely to be.|
|House shape and style||More complex house shapes result in higher rebuilding costs. For example, homes with many corners are likely to have a higher replacement cost.|
|Features and finishes||The quality and breadth of home features will affect your replacement cost. For example, high-quality roof and flooring materials will result in higher replacement cost.|
|Home fixtures||The quality of home fixtures—such as cabinets or countertops—can greatly affect replacement cost. The type of heating, cooling and electrical systems installed in your home can also influence the estimated cost of rebuilding your home.|