Whether you live in the Silicon Valley or Santa Cruz County, you home is most likely your single largest investment and it is imperative to properly insure it in the event of fire or other damage that it may sustain.
One of the costs associated with owning a home is homeowner’s insurance. Quite often, we set up this insurance during the purchase of our residence and then simply continue to pay it annually. It is critical to review all insurance policies frequently and it is especially important to evaluate the estimated replacement cost coverage on your homeowner’s policy to confirm your property is adequately covered.
What is Estimated Replacement Cost?
This line item in a homeowner’s policy, often called ‘dwelling coverage,’ specifically covers the cost to repair damage to your house or to rebuild it to an equal level of quality at current prices.
Replacement cost is NOT:
- The market value of your home (what it would sell for including cost of the land)
- The purchase price of the home
- The cost of the land on which it sits
- The remaining balance of your mortgage
It is important to note that only specific loss or damage is covered by a primary homeowner’s policy. Flood or earthquake insurance must be purchased separately to attain full coverage of your residence for these types of ‘forces of nature’.
The Difference Between Replacement Cost and Actual Cash Value
Actual Cash Value factors in depreciation when calculating the amount you are owed. This can significantly impact the amount the insurance company will pay for, especially on a large claim like a home rebuild or replacement of personal possessions.
Replacement cost (or value) covers the amount it takes to rebuild or repair your home, depreciation not withstanding.
Though the majority of homeowner’s policies automatically provide replacement cost value for the structure of your home, this isn’t always the case, and is quite often NOT the case when it comes to your personal belongings.
The required minimum replacement cost is 80% but it is strongly recommended to choose an estimated replacement cost at least equal to the amount it would take to rebuild it to its existing condition. If your home is older, it may not be completely code compliant, and this is something to take into consideration when choosing proper coverage. The city will generally require any rebuilding project to bring the property up to current code requirements, and this could very well add to the replacement cost.
Some things to consider when choosing the correct estimated replacement cost coverage include:
- Recent home remodels or renovations
- The addition of any living space or rooms
- If your home has upgraded or high-end kitchens and baths, or if you’ve recently updated these spaces, including cabinetry
- If your residence includes expensive custom architectural features such as unique trim or moldings, arched windows, built-in cabinets, or other distinctive qualities
It is also vital to take into account various economic factor such as inflation and market conditions in your neighborhood in addition to increases in the cost of construction. All of these play a role in what it will cost to rebuild or repair your residence.
How To Determine The Amount Of Coverage You Need
The quick way to estimate the replacement cost of your home is to multiple the total square footage by the building cost per square foot in your area. The cost per square foot to rebuild varies depending upon whether you have a one or two-story home and will also be higher if your home is custom or includes considerable upgrades.
Other things to factor into your analysis include:
- Exterior features: stonework, high-end windows and special siding all add to the cost.
- Flooring: hardwood or custom flooring should be taken into account.
- Roof replacement: Depending upon the type of material used as well as the age of your roof, the replacement cost could be significant
- Cabinets, appliances and fixtures: Whether your kitchen and baths are outdated or updated, all of these items play a large part in the cost of rebuilding
- Personal possessions: If your home has been severely damaged, odds are your furniture, electronics, clothing and other items are also unusable. The cost of these things isn’t part of the dwelling replacement cost but is a pertinent part of your policy. It is important to have the correct coverage as well as keep a detailed inventory of everything in your home.
Your insurance agent can calculate the estimated replacement cost on your behalf. They have software that uses a variety of information to arrive at the amount. This is a fairly simple, quick and accurate method.
You can also utilize an online replacement cost calculator. This can take a bit more work on your end but can provide an accurate idea of your home’s replacement cost when filled out completely and precisely.
Below are a few online calculators, some which offer free analysis while others are fee-based and/or require creating an account.
The most accurate way to determine the replacement value of your home is to hire an independent appraiser. Be sure to indicate to the appraiser that you want to obtain the replacement cost for insurance purposes. In addition to coming out to your home to take photos and examine the foundation, exterior, roof, plumbing and electrical systems, HVAC systems and interiors finishes, appliances and custom amenities, they will also conduct research on the rates for construction, labor and materials in your area. Ultimately, they will arrive at a comprehensive replacement value. This method will cost you the appraiser’s fee but again, it will give you a thorough and accurate valuation.
It is worth taking the time prior to renewing your homeowner’s insurance every year to confirm that your home is adequately covered in the event of the need to rebuild or repair your home. This is especially true if you’ve recently updated your residence.
For more general information on homeowner’s insurance, click here to read a previous blog on the subject.