One of the most common questions for homeowners’ insurance coverage is the difference between market value and rebuild cost. The two are not directly related.
Insurance companies base your premium on the cost of rebuilding rather than the value of the home. Knowing how to differentiate between the two can make a difference in the amount you receive in the event of a disaster.
Simply put, in the aftermath of a disaster you will be looking to rebuild your house, replace your contents, and re-establish an equal standard of living.
How Market Value Differs From Rebuild Cost
When the US property market turned in 2008, homeowners saw the value of their properties fall, yet this didn’t affect their insurance premiums. Market values are far more subjective. They can vary depending on location, the surrounding land, the economic climate, and home improvements.
Rebuild costs are often higher than market values, sometimes 50% or more above the selling price. This cost, however, is not constant. Construction costs can vary and fluctuate depending on the cost of labor and materials.
Rebuild costs take more into consideration such as the cost of: demolition, site clearance and preparation, and surveying –this is before any building takes place. Then there’s the cost of building materials: insulation, lumber, and fixtures and fittings for kitchens and bathrooms - which are the most expensive rooms to build.
Effectively Establishing Your Rebuild Cost
If you haven't reviewed the value of your home lately, or if you have made some improvements to your home, contact your insurance advisor and request a replacement cost estimate. You can also ask a qualified building or real estate appraiser to analyze your property. Either way, this will allow you to accurately adjust your coverage accordingly. While taking the cost of the building into account, it’s also worth taking into account extras and recreational features like swimming pools and other structures to be able to purchase additional coverage if needed.
Rebuild value is a very important aspect of your insurance premium. Underestimate it and you could find yourself in an unhappy situation.
