What Is a Home Replacement Cost Estimator
According to a 2016 study conducted by the Insurance Information Institute, 95 percent of American homeowners had homeowners insurance. That's nearly 70 million homeowners with coverage. However, about two out of every three homes are underinsured.
According to Nationwide, the average underinsurance rate for homeowners is about 22 percent. Some homes are underinsured by as much as 60 percent or more. When a disaster damages or destroys an uninsured or underinsured home, homeowners can pay thousands in unexpected expenses out of their own pockets to cover losses.
What Is a Home Replacement Cost Estimate?
Your replacement cost estimate is an estimate of how much it will cost to rebuild your home from scratch if it's destroyed. This figure will also tell you how much dwelling coverage you will need under Coverage A. Your dwelling coverage limit should always equal the building costs for your home instead of its fair market value, excluding the value of land, which is not covered by homeowners insurance.
What Is a Replacement Cost Estimator?
A Home Replacement Cost Estimator (RCE) is a tool an insurance company uses to estimate how much it will cost to rebuild your home if a total loss occurs. Your insurer lists this cost estimate under your dwelling coverage or Coverage A. There are five things to remember about RCEs, according to the Lighthouse Excalibur Insurance Company:
- RCE ensures you have adequate coverage should a total loss occurs, preventing you from purchasing too much or too little dwelling coverage.
- An RCE is an estimate based on your home's construction material, labor and permit costs.
- An RCE is an accurate way to determine the rebuild cost of your home and how much dwelling coverage to buy.
- A home appraisal is not the same as an RCE. Appraisals include recent property sales, your home's condition and the land. RCE only considers the materials and labor of rebuilding your home.
- An RCE helps you insure your home for 100 percent of its estimated replacement cost so you don't have out-of-pocket expenses.
What Factors Influence Replacement Cost Estimates?
Several factors influence replacement cost estimates:
- Square footage
- Number of rooms
- Architectural style
- Roof type
- Number of stories/levels
- Type of home foundation
- Heating system
- Home's age
- Home fixtures
- Features and finishes
- Improvements and renovations
- Construction costs
What Is Extended or Guaranteed Replacement Cost Coverage?
Extended or guaranteed replacement costs can protect homeowners whose rebuilding costs may exceed their policy's limits. You can add these endorsements to your insurance coverage for an additional premium. .
Let's explore two scenarios where you may need additional coverage:
If you live in a region that has frequent natural disasters like storms, earthquakes or wildfires, your repair costs may be high and varied, depending on your area's current building codes.
If you live in a coastal region where a tropical storm damaged thousands of homes, your area may have fewer supplies available for people to rebuild their homes. This demand would cause the costs for materials to skyrocket. As a result, your rebuilding costs may exceed your policy's coverage limits. You would have to pay for these expenses out of pocket.
Your government may prohibit construction in your area if it has frequent natural disasters, such as coastal or inland flooding. Due to this restriction, you may have to build your home on new land, which may drastically increase your costs.
Extended Replacement Cost Policy
This coverage pays to have your home repaired or rebuilt to its prior condition, even when the loss exceeds your dwelling limits, up to the maximum amount. This maximum is usually 25 to 50 percent of your coverage limit. For instance, if your home is covered for $400,000, you would get an extra $200,000 with a 50% extended replacement cost coverage.
Guaranteed Replacement Cost Policy
This add-on insurance enables you to repair or reconstruct your home to its previous condition, regardless of how high your rebuilding costs are. This coverage doesn't have a maximum amount. So, if you own a $600,000 home, and it cost $900,000 to repair, your insurance may cover the full amount.
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Replacement Cost vs. Actual Cash Value: What's the Difference?
When estimating the average cost of replacing your home, you should consider replacement cost versus actual cash value on your policy. The two valuations can significantly affect the final settlement amount you receive. If you don't have enough coverage, you could pay for expenses yourself.
Here is the difference between the two valuations:
1. Actual Cash Value Policy (ACV)
Under an actual cash value policy, your insurer considers the depreciated value of your home and belongings when calculating your payout. This consideration can have an enormous effect on your final settlement.
Every carrier has a different formula to calculate depreciation. For instance, you may have to pay most of the replacement costs if parts of your home's structure have approached their estimated lifespan.
The carrier will also factor in depreciation regarding your possessions. For instance, if you owned a stereo system for five years that cost $600, and it depreciated $60 every year you owned it, you'll only receive a settlement amount of $300. Insurers will apply this process to every item you own.
2. Replacement Cost Value Policy (RCV)
A replacement cost policy covers the rebuilding costs for your home without considering the depreciated value of your home. For instance, your homeowners insurance policy will pay to rebuild your home at the current market value in order to restore it to its original condition.
RCV will help you fully rebuild if your home is a total loss. For instance, if a tornado rips through your neighborhood, destroying your home and all of your possessions, your homeowners insurance policy would pay to reconstruct your home and replace these items with new ones at current market prices.
RCV coverage is more expensive and will raise insurance rates; however, it will ensure that you have enough coverage if your home is a total loss. Most standard homeowners policies cover your home's structure using replacement value coverage. They use actual cash value coverage to calculate your personal property replacement cost.
How Much Insurance Do I Need?
Your home insurance coverage should follow the 80/20 rule. Dwelling coverage should account for 80 percent of your home's replacement costs. If not, your insurer may not fully cover your expenses.
How to Calculate Your Home Replacement Costs
Generally, a homeowners insurance agent will use a replacement cost calculator to determine how much coverage you'll need to rebuild your home. You can calculate this figure yourself, but you will need to determine how much building costs are per square foot in your area. Your figures should include the following factors:
- Foundation and footings
- Structural framing and materials
- Roof condition and materials
- Exterior walls
- Interior walls
- Electrical systems and wiring
- Plumbing and pipe systems
- Heating/cooling equipment and systems
- Interior finishes, walls, doors and cabinetry
- Construction costs, permits, materials and labor
Multiply these costs by your home's square footage to figure out your insurance replacement cost.
You can get a replacement cost estimate for your home by using an online home insurance calculator. There are online calculators and fee-based services you can use for these calculations.
Additionally, you can hire an appraiser that specializes in replacement cost appraisals.
Home Insurance To Repair or Replace Your Home
A replacement cost estimate is a valuable tool that can help you calculate how much it will cost to rebuild or replace your home, an important piece of information when selecting a homeowners insurance policy and its dwelling coverage limits.
When selecting coverage, remember that Extended Replacement Cost policies give you an additional 25 - 50% over your home insurance policy limits. There are no limits with Guaranteed Replacement cost policies. Additionally, consider whether Actual Cash Value or Replacement Cost Value would provide better coverage for your home.
SmartFinancial has insurance comparison tools that can simplify the shopping process for a new or better homeowners insurance policy at a low price. Get a free home insurance quote by entering your zip code below.
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