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

Kelly C. Gamble

Many homeowners are perplexed by the gap between the market value of their home and the replacement cost on their homeowner’s insurance policy. With the declining market values, these numbers are becoming farther apart and many people are asking themselves why the big discrepancy. Your homeowner’s insurance is a contract to rebuild your home, not to buy you another one like it down the street.

While the market values seem to continue to decline, reconstruction costs are still on the rise. The cost to rebuild your home is not the same as sales price and lowering your policy limits could be a detrimental mistake. Rebuilding generally costs more than new construction because it involves removal of debris and working around 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 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. The square footage, number of bathrooms, exterior siding, among other factors, is 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 stipulation that states a property must be insured at 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 lowering 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 want to consider increasing your deductibles. Insure multiple policies with one insurance provider. Many companies offer discounts for having your home and car insurance with them.

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