Homeowners insurance is based on dwelling replacement cost. This numerical figure considers the cost of rebuilding the structure from the ground up using like-quality materials. Factors like square feet, type of construction, building materials, special features, number of kitchens and bathrooms, and attachd versus detached garage affect your home's replacement cost.
Replacement cost is different than market value, appraised value, and actual cash value. Market value is how much you can get for the property at any given time. The appraised value is an objective, third-party assessment of your home's value. Actual cash value considers the depreciation o building materisls used to construct the house. Each valuation has a purpose, but replacement cost is the one that matters when it comes to homeowners insurance.
The dwelling coverage limit is the most the insurance company pays if the house is destroyed by fire, tornado, or other covered loss. It is best to insure the structure for its full replacement cost. Many insurers offer extended, or guaranteed replacement cost add-ons that allow a claim payment to be above the coverage level state on the policy. Check for a maximum payout, often 25 percent above the limit. Be familiar with the policy's co-insurance requirement if you opt for a dwelling limit below the structure's replacement cost. Partial structural losses can be covvered on a replacement cost basis as long as the dwelling is insured for 80 percent or more of its replacement cost.
Increases in the cost of lumber, concrete, wiring, and other building materials directly affect replacement cost. So do home improvements like adding a deck, replacing kitchen cabinetry, installing hardwood flooring, finishing the basement, and other upgrades. Review your dwelling limit and calculate your home's replacement cost every year. Then, evaluate the two figures and increase coverage when necessary.
Your local homeowners insruance agent can assist in determining your home's replacement cost.