Have you ever wondered why it’s recommended that you insure your home for more than you actually paid for it? Below, we’ll help you understand two important home insurance valuations: Market value and replacement cost.
Understanding Home Insurance Valuations
The first thing to know about choosing the amount of home insurance coverage you’ll need is that you must decide upon the amount before you close on your home. This is generally the requirement of most mortgage companies.
Therefore, you’ll need to speak with an insurance company as soon as you know you’re going to purchase a new home. You’ll have a lot of choices when it comes to choosing the exact type and amount of coverage that you want. Naturally, this is not an occasion to be lax on coverage. The basic rule is, the more it costs to purchase something or the higher the value is to you — whether the item is a home, boat, car, or priceless heirloom — the more and better insurance you need.
For most people, a home is the most valuable thing they’ll ever own. This means that you’ll need to adequately insure your home so that you aren’t left in the lurch in the event of a catastrophe.
Choosing a Coverage A Amount
Now that you know how important it is to choose adequate coverage for your home, you need to know about the most important choice you’ll be making in this area — and that is choosing a coverage A amount.
Coverage A refers to dwelling coverage — the total amount that you want to insure your home for.
This may seem like a simple concept, but many people get confused when it comes to choosing coverage A for their homes. That’s often because they simply assume that they should insure their home for an amount equal to what they’re paying for it.
Some people, however, rightly understand that it’s often more expensive to build a home than it is to replace a home after an accident or catastrophe. But in this case, people incorrectly assume that whatever the “replacement cost” of their home is, this is how much they should insure it for.
All of this confusion comes down to understanding two terms that you should definitely know before you purchase your home insurance: Market value and replacement cost.
The Difference Between “Market Value” and “Replacement Cost”
“Market value” and “replacement cost” both refer to the value of your home. But notably, these two amounts will always be different because they are different valuations. In other words, they both put a value on your home, but they come at the value from different angles.
First, the market value of a home is what it is worth on the market right now — when the same involves a willing buyer and a willing seller.
The replacement cost is how much it would cost to replace your home right now.
These amounts will almost always be different because it is almost always more expensive to replace a home than it is to purchase a new one. Furthermore, you should never consider the price of the lot that your home is on in a replacement cost valuation. Finally, remember that property value and prices for materials and labor can change over time — this will also affect both the market value and replacement cost of your home at any given time.
In the end, it is very possible that you’ll need to insure your home for more than its market value. The only way to know for sure how much to insure your home for is to speak to a professional insurance agent who can put all of your numbers into a Replacement Cost Estimator and give you your best possible Coverage A estimate.
You can speak to any agent at Krog Insurance any time to discuss your home insurance options. We have locations in St Paul & Virginia, Minnesota. Call or stop in today!