Homeowners insurance is designed to protect homeowners from the financial burden of having to repair or replace the structure and contents of a home in the event of a covered loss. Home insurance replacement cost is the amount of coverage needed to adequately insure a home.
Homeowners are sometimes surprised to learn that the replacement cost of a house can change over time. There is a risk in treating homeowners insurance as a āset it and forget itā expense, because just like other expenses, the cost to rebuild changesāusually going up.
How is replacement cost calculated for home insurance?
The cost of rebuilding a home in the event of a total loss will be affected by a number of factors. One common method of calculating replacement cost is to multiply the homeās square footage by the local cost to rebuild per square foot in the area.
The age and style of a home will also be factored into replacement cost calculations.
You may wonder why a homeās age would factor into the rebuilding cost, and much of the answer to this question is tied up in materials and workmanship costs.
Older homes can feature designs and materials that are scarce or no longer available. A three-story, 120-year-old Victorian home with a carved walnut wood staircase and spindles will cost significantly more to replace than a carpet-over-plywood two-story staircase in a builder-grade Colonial built in 2000.
The local cost of rebuilding also factors into labor costs in your area. If thereās a shortage of construction workers, the cost to rebuild goes up considerably.
Is my homeās replacement cost the same as its purchase price?
Replacement cost is not the amount you paid for your home. A homeās purchase price is different than the cost to rebuild or repair the structure.
This can be a little confusing because there is a logic in thinking that what you paid for your home is what it would cost to replace itābut that is not the case.
A homeās purchase price is made up of a lot of different factors, including market availability, demand, the cost of the land the home is built on, and even things that make a neighborhood desirable, like the quality of schools and whether a park is nearby.
Replacement cost only looks at what it takes to rebuild the home in the same spot. So, the cost of the land is not a factor or any of the neighborhood amenities.
What affects the replacement cost of my home?
Many things affect the calculation of replacement cost for your home. Materials, inflation, and even the local labor market can have an impact on what it might cost to replace your homeās structure and contents.
The cost of building materials has a very clear and direct effect on the cost of rebuilding a home.
Inflation and supply chain shortages can also have an impact. Although the most severe price spikes observed during the pandemic have eased, some price increases have lingered.
When should I update my home insurance replacement cost?
Updating your home insurance replacement cost regularly is important because accidents and damage can happen at any time. But, you should also review coverage after making improvements, or if there are significant market changes in your local area or region.
Annual Review ā The general recommendation is that homeowners should review replacement cost coverage once a year. This is typically best done at renewal time because thatās a set date when homeowners are thinking about their insurance rates.
Reviewing and potentially updating home insurance replacement cost annually is a good habit to get into, as it acclimates homeowners to thinking about how rising costs affect insurance coverage and rates.
Remodeling ā Because the calculation of your homeās replacement cost factors in things such as materials and square footage, any time you remodel or extend the livable space, you need to update your homeowner’s insurance.
For example, if you decide to convert an attic space into a guest room, you are increasing the livable space area of your home. Common upgrades such as kitchen and bathroom remodels increase the value of your home, and youāll want to make certain that these renovations are covered.
If you experience a covered event, such as a kitchen fire, your homeowner’s insurance will only pay to repair it to the amounts in your policy. If you went through a total kitchen remodel, replacing cabinets and installing granite countertops instead of laminate but neglected to update your insurance coverage, your insurer will only pay to replace your kitchen with the lower-grade materials that were in the original policy.
Any time you upgrade your home, update your home insurance replacement cost to make certain the improvements are covered. And, some improvements made during remodeling could even save you money on your premiums. New electrical wiring in an older home, plumbing upgrades, storm shutters, and new roofs are examples of improvements that could lower your premiums, as they make your home less susceptible to expensive repairs.
Sudden Market Shifts ā The cost to rebuild a home is very dependent upon local conditions. Some of these might escape the average homeownerās notice unless they have reason to track things like the local unemployment rate, average building costs, or the price and availability of lumber and sheetrock. If your area experiences a weather event or natural disaster that results in damage large enough to make the news, it is likely that construction costs in your area will increase.
How to stay on top of replacement cost changes
The best way to keep replacement costs updated is to regularly review your coverage with an insurance agent. Homeowners who skip this step out of concerns that their rates will increase are putting their homes at risk. The last thing you want to hear after a fire or tornado damage is that you donāt have sufficient coverage to rebuild your home to the same standards as it was originally constructed.
Contact the experts at Rate Insurance for up-to-date quotes to cover your home. With access to many top insurers, they can find you the right coverage for your home at the right price.
Disclaimer:
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate Insurance does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate Insurance. Rate Insurance, its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
