Replacement cost is the amount it takes to rebuild the home using materials of like kind and quality without subtracting for age or wear and tear. Replacement cost is not the same as market value. Market value is a real estate term that refers to the current value of your home if you were to sell it.
Traditional homeowners insurance pays to repair or rebuild the dwelling when a covered loss occurs. Depreciation is not a factor. In turn, insurers require a dwelling limit based on the cost of rebuilding the structure. Check your policy's co-insurance clause to confirm the specific amount of coverage necessary. Eighty percent is common, but you may need 100 percent if you have extended replacement cost.
Ask your insurance agent for help determining your home's replacement cost. The figure is based on square feet, building materials, and special features. Review the coverage limit annually, and adjust as needed.
Not having enough insurance becomes a problem when a loss occurs. The claim settlement may be far less than the cost of repairing damages. Check your homeowners policy for specific penalties that apply to claims on underinsured homes.