When buying home insurance, one of the most important things to know is your home's replacement cost. The replacement cost is how much it would take to rebuild your home with similar materials if it's damaged or destroyed. It is tied to the amount of coverage you select and the amount your insurer will pay you if you file a claim.
You will have to choose a “dwelling coverage” amount when you're shopping for a policy. You should select a dwelling coverage amount that best matches your home's replacement cost. The cost to repair damage to your home or rebuild it completely at equal quality — at current prices – is the replacement cost.
You don't want to have an inaccurate replacement cost, as its tied to how much dwelling coverage you purchase, so you can be at risk for being underinsured. It's a common oversight, as about two out of every three homes in America are underinsured.
The average underinsurance amount is about 22%, though some homes are underinsured by 60% or more, according to Nationwide. Analytics firm CoreLogic found that about three in five American homes are insured for an average of 20% less than full value.
Figuring out an accurate replacement cost can be a challenging task, so here we explain in detail:
- Why replacement cost is better than actual cash value
- Replacement value vs. actual cash value
- Factors that affect replacement cost
- How to find the replacement cost of your home
- Do-it-yourself replacement cost calculations
- Use an online replacement cost calculator
- Hire an appraiser to conduct a replacement cost assessment
- Final tips for effective replacement cost policies
You should insure your home based on its replacement cost, which is the amount you need to rebuild it if damaged or destroyed, and not its market value, which is what you could sell your home for in its current condition. Replacement cost offers more protection because the cost of building a home often exceeds its market value.
Here's the difference between actual cash value and replacement cost. (Read our guide on different types of home values for more information on how much your home is worth, and how those different valuations affect insurance rates.)
Actual cash value (ACV): This type of policy takes deprecation into account when calculating your payout, which can make a huge difference on a large claim.
While every insurer has a different formula for calculating depreciation, a common method is to determine the expected life span of a product and subtract a certain percentage for each year since it was purchased.
As an example, if your roof was 15 years old at the time of the claim and it had a 20-year lifespan, you will be covering the majority of the cost for a new roof.
The same goes for your possessions. “If you paid $1,000 for a TV six years ago and its lifespan is 10 years, you are looking at $100 in deprecation for every year you have owned it, or $600, which means your claim check will be $400,” explains Kristofer Kirchen, president of Advanced Insurance Managers. “Now apply that same idea to everything else you own that was destroyed.”
Replacement cost or value: Replacement value, on the other hand, will cover rebuilding costs, regardless of depreciation.
As an example, if a fire destroyed your home and possessions your insurance policy would pay to rebuild your home at current market prices, regardless of the fact that rebuilding costs have probably risen over the years.
The same goes for your possessions. If you had upgraded your homeowners policy to replacement value on your personal possessions, you would be getting a TV of similar size and quality, regardless of the cost.
While most standard homeowners policies will cover the physical structure of your home at replacement value, many assign actual cash value coverage to your personal property.
One important point of a replacement value policy is the 80/20 rule. “Your single-family, primary residence must be insured to at least 80% of the property’s replacement cost,” says Patti Clement, senior vice president with the private client services division of HUB International. If not, your insurer may not cover the entire cost to rebuild the house.
“While 80% is the minimum requirement for replacement cost value, it is always highly recommended that our clients insure their homes for full value," says Clement.
Replacement value claims may be paid in two installments with an insurer paying out the ACV at first and then reimbursing you for the difference after repairs have been made or you purchase a replacement item.
Many insurers are phasing out actual cash value when it comes to homeowners insurance, at least for the structure. “Structure coverage at replacement value is becoming much more popular with major carriers; however, property can go either way depending on the company,” says Luke Kinton, an insurance agent in Madison, Alabama.
While it is still possible to buy a policy that covers your home’s structure at actual cash value, this can lead to some major expenses for you. If your home and all of your possessions are destroyed by a catastrophic event, your share of the bill can easily run into the tens of thousands of dollars.
Pricing will vary by a number of factors but in general, expect to pay roughly 10% more to upgrade your policy to replacement value.
Dealing with the aftermath of the fire or tornado is difficult enough without having to worry about the cost to rebuild your home. This is why carrying the right amount of insurance is important.
One of the most common mistakes that homeowners make is basing the replacement cost of their home on the current market value. “Rebuild cost is not market value and customers have a hard time accepting this,” says Kinton. “A house may sell for $250,000, but the rebuild cost may be $120,000 and the latter amount is what underwriting is going to cover.”
The market value of your home includes the value of the land it is sitting on so the cost to rebuild your home is often much less than the current market value. However, it is possible that rebuilding costs can also outpace the market value of your home, especially if it is older.
Here are a few factors that can impact the rebuild cost:
Age: If your home is older and has features that are hard or expensive to replicate, such as plaster work and custom molding, or is filled with outdated plumbing and electrical, the rebuilding cost may be more than the current market value of your home.
Building codes: This mainly affects older homes as well. While homeowners are usually not required to upgrade their homes every time the building codes change, if your home is destroyed and needs to be rebuilt, the current building codes will apply.
Your coverage levels also impact your personal possessions, as personal property coverage is a percentage of your policy limits. “The coverage on your personal property is about 50 to 70% of what you insure your structure,” explains Carole Walker with Rocky Mountain Insurance Information Association.
The takeaway here is that if you don’t have enough insurance on the structure of your home, your possessions may be underinsured.
In most cases, your insurance agent will calculate the replacement value of your home. “Typically, a cost estimator for the dwelling should be done by an agent,” says Kirchen.
If you're unhappy with the number, or just want to verify it is correct, you can do it yourself. Options range from doing it yourself to hiring a professional appraisal.
This method requires a bit of legwork, but it’s free.
Contact local homebuilders and insurance agents to determine building cost per square foot in your area and then multiply that by your home’s square footage.
According to the National Association of Home Builders, the average build price in 2019 is between $100 and $155 per square foot. The average costs of building a new 2,000-foot home is between $201,000 and $310,000 depending on your location. The northeast has the highest average square foot costs ($155), while the south has the lowest ($100).
Factor in the following to your calculations as well:
- Flooring: If you have hardwood or custom floors get quotes from local installers on the cost to replace your flooring.
- Cabinets, fixtures and appliances: If your kitchen is outdated, replacing it with a new one will be costly. Price cabinets, fixtures, and appliances to get an idea of cost.
- Replacing your roof: Depending on the materials and age of your roof, this can be a major expense. Have a roofing company give you an estimate.
- Exterior features: High-end windows, stonework and siding can all add up. Estimate the cost to replace your windows and exterior coverings as well as decks, patios and other outdoor structures.
- Personal Possessions: Your personal possessions can add up to a major part of your claim. Keeping a detailed inventory of your possessions will ensure that you are fairly and fully reimbursed for your furnishings. There are a number of apps available that can assist with your inventory.
While not as accurate as the do it yourself model, these online calculators can help determine your home's replacement value. Some options are free while others come with a fee.
Craftsman Building Cost Calculator: This completely free tool requires you to enter information about your home and then it spits out a replacement value report.
My Bluebook: This site pulls up publicly available information on your home. Plug in a few additional details and the site gives you a replacement value figure.
In addition, you can put together a comprehensive home inventory. The site is free for seven days and a one-year subscription is $14.95.
Dwelling Cost: This site offers a free trial and then goes to $8 a month or $75 per year. You have to enter some basic information about your house as well as the address to get a fairly detailed report.
This is probably the most accurate method of putting a replacement value on your home.
An independent appraiser will come to your home and give it a thorough inspection, taking photos and video of your home. In most cases he or she will examine the following:
- Foundation and footings
- Structural framing and materials
- Roof condition and materials
- Exterior walls
- Interior walls
- Plumbing and electrical fixtures, wiring and pipe systems
- Heating/cooling equipment and systems
- Interior finishes including walls, doors, cabinetry as well as built-ins and other custom touches
The appraiser will research local market rates for construction, materials and labor to produce a report with your home's replacement value.
The price of an appraisal can vary dramatically between locations but expect to spend a few hundred dollars at a minimum.
The price difference between an ACV policy and a replacement cost policy is usually pretty affordable and it can be a financial lifesaver if you suffer a major loss. Here are a few final tips regarding replacement value insurance:
- Inventory: A detailed home inventory is important. Document all of your belongings, including serial numbers, date purchased, and price paid.
- Reevaluate yearly: Check your policy against the local building cost every year as building costs can rise dramatically from year to year. Check with your insurer about an inflation guard clause, which automatically adjusts your dwelling limits to reflect the latest construction costs.
- Make a video: Document the interior and exterior of your home. Include items such as appliances, mechanicals, flooring, cabinets, roofing and any other structures on your property.
- High value items: “A standard homeowners’ policy has minimal coverage for jewelry, furs, silver, and other high value collectibles,” advises Clement. In order for these items to be fully covered you may need a rider to cover these items separately.
Choosing between actual cash value and replacement value is critical to your home insurance coverage. Make sure you understand the pros and cons of each.