When shopping around for homeowners insurance in Germantown, most insurance agents will use a program called a replacement cost estimator (or calculator) to estimate the amount of insurance you need for your home.
When they use this tool, don’t be surprised if the number they come up with is significantly higher than what you perceive your home’s value to be.
Why is this the case?
The amount you perceive your home’s value to be is likely the amount you paid for it or how much you assume you could sell your home for. On the other hand, the insurance amount your agent reveals that you need is how much it would cost to replace your home in a situation where it was totally leveled. These are two entirely different things. Namely, we’re talking about the terms market value and replacement cost.
How Do Market Value and Replacement Cost Differ?
Market value and replacement cost are two useful terms to know the definitions of when shopping around for homeowners insurance.
First, let’s take a look at market value.
Market value is one of several valuations you can come up with for a home. It refers to the value of your home on the market. Pretty simple, right?
Some people think the market value of a home is how much the current owner paid for it. This isn’t actually the case because what’s critical to remember here is that the value of any home will change over time. It may improve or in some cases, depreciate.
For example, if you bought a home in an up-and-coming neighborhood ten years ago, it may be worth a lot more today because of the improved value of the land and geographic location. The opposite can also occur too.
For this reason, always think of market value as for how much your home is worth on the market right now.
The truth is that market value has nothing to do with replacing your home after damage or destruction. It’s simply about the actual selling price of your home were it to be sold (in a fair sale by both parties).
The valuation that deals with how much your home would be to replace is (you guessed it) the replacement cost.
The replacement cost of your home takes many factors into account. These factors include the price of your home’s:
- Foundational structure
- Walls and exterior finishes, including windows and doors
- Permanent interior structures
- Any attached structures such as mother-in-law apartments, garages, decks, sunrooms, etc.
To calculate the replacement cost of a home, all of these factors must be priced as accurately as possible. Keep in mind here that they must be priced according to how much they would cost to be replaced.
This is different from pricing the value of the product alone (shelf price only) because you must factor in shipping and/or transportation costs as well as building permits and labor costs.
It’s also different from simply looking at how much it cost to purchase and install the products/materials when the house was built. Let’s say that your home was built 50 years ago. Product, material, and labor costs will have changed drastically in that time period.
Your Insurance Agent Can Do the Footwork for You
In the end, the replacement cost of your home is the valuation to regard when choosing a homeowners insurance amount.
As you may imagine, figuring out all of these prices and estimates can be a challenge. Fortunately, your homeowners insurance agents at Frydach Insurance are here to assist you.
Give us a call at your convenience to make an appointment and assess your optimal homeowner’s insurance amount.