Be familiar with your home's replacement cost - which is not the same as its market value. Replacement cost refers to how much it takes to rebuild the entire structure from the ground up with materials of like kind and quality. There is no depreciation for age or wear and tear. Market value is a real estate term based on how much a potential buyer is willing to pay for the home if you were to sell it. Land price affects your home's market value. Homeowners insurance is based on replacement cost.

Your home's replacement cost considers factors like square feet, exterior wall construction (brick, stone, siding), interior building materials like flooring (hardwood, custom flooring carpet), cabinetry, fireplaces, countertop materials, lighting fixtures, roofing (asbestos, steel, shake, tile), room count and special features (attached garage, deck porch). Your local homeowners insurance agent can help you determine the replacement cost of your home.

It is best to insure your home for an amount equal to the cost of completely rebuilding it. The lowest you can go without a claim settlement penalty, called the co-insurance requirement,, is outlined in the policy. Most contracts require a minimum dwelling limit equal to eighty percent of the home's replacement cost.

Insuring your home below the co-insurance requirement becomes an issue if a claim occurs. In fact, depending on how much coverage you have, how much coverage you should have, and the amount of the claim, you may get thousands of dollars less than necessary to repair or rebuild. Homeowners can avoid this situation with an annual policy review that includes a dwelling replacement cost check.