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How Do Insurance Companies Estimate The Home Replacement Value?

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How Do Insurance Companies Estimate The Home Replacement Value?

Leaving yourself unprotected in the face of disaster is a terrifying situation to be in especially if applied to your home and your insurance. Yet many homeowners unknowingly find themselves in this situation every day. It’s because of the home replacement value.

The home replacement value is the overall cost determined by your insurance company it would take to completely rebuild your home. This includes materials, construction, replacement, cleanup, etc. It can become a rather hefty figure, but some homeowners are still undersold on the amount of coverage they purchase.

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When your insurance company gives you an appraised home replacement value, they are doing so based on market data and generalizations. Every home is different, and every situation is too, meaning a generalized estimate of your home’s replacement value could lead to drastic financial issues if disaster strikes.

Know your home’s replacement value and how your insurance company estimates a home replacement value. Getting the best insurance for you and your home will save you from financial stresses in the long run.

What factors go into Estimating the value?

Many factors will go into estimating your home’s replacement value. Factors can even vary from insurance company to insurance company. They most definitely differ based on the region you are in. You may find that materials cost more to obtain in your area than they would somewhere where they are more readily available leading to a higher replacement value for you.

Insurance companies will estimate your home replacement value based on costs of local labor, readily available materials, additions you may have built, age of the house, etc. To put it simply, they factor in anything that will affect how much your home will cost to rebuild.

The following are a few of common factors that will affect your home replacement value:

Home’s location

Where your home is will affect how much your replacement value is. If you are located in a prime slot of real estate, your company may determine your replacement value to be higher.

Year of construction

The age of your home is a big factor insurance companies will use. If your home is older, materials used to construct it may be harder to come by or they may be cheaper than newer homes. It’s all situational, so know your own situation.

Cost of local labor

Construction companies will give different estimates on how much they will charge. Your local construction company will probably be the ones selected by your insurance to rebuild your home. Know their average costs and company ratings.

Building materials

Your home may have been built out of a rare wood that is found in a specific region. If this is the case, then it will be more difficult to obtain those materials driving up your home replacement value.

Quality craftsmanship

If you have upgrades within your home like granite countertops, custom windows, artistically crafted crown molding, you may have a higher replacement value than someone without those features.

Home size

The bigger the home, the more materials required to rebuild. Some homes are generally decided to cost about $150 per square foot to replace, so the bigger your home, the more square feet to factor in.


Any added rooms or wings to your house that you have made throughout your time living there will affect the replacement value. If you’ve finished your basement and added a garage, you will have more to replace.

Check local prices and do your own research. Your insurance company will cover you for basic localized generalizations, not the specifics that pertain to you and your home. By knowing what factors go into determining your home’s replacement value and how they change based on where you are, you can properly protect your home and your wallet.

How much coverage you need

It’s pivotal to note that your home replacement value is different from your appraised market value or your mortgage loans. This is a common mistake many homeowners make and unfortunately, it’s a financially detrimental one. Insuring your home for your market value could leave you stranded when disaster strikes.

If you insure your home at market value of $200,000 but your replacement value is determined to be $300,000, you’re stuck with $100,000 that may need to come out of pocket. Insuring for the wrong amount can lead to a whole different form of disaster.

The difference between your home’s market value and your home’s replacement value is big. The market value is based on land value and market pricing fluctuations whereas your replacement value is your home’s bare cost to rebuild.

Generally, your replacement value will be more than your market value leaving you in need of a higher insurance policy. Your market value can fluctuate but your replacement value will typically stay the same. Contact your insurance company to begin the home replacement value appraisal process soon and find the policy best for you.

How to Estimate your own replacement value

It’s rather simple to determine your home’s replacement value and can be done anywhere with access to a pen and paper. Find out your local construction cost per square foot. In this example we will say $100 per square foot. Then find out your home’s square footage and multiply it by the cost per square foot.

For a home of around 2,500 square feet, you would want to buy insurance that covers at least $250,000 in repairs and replacements. Once you’ve found this value, look to compare quotes from insurance companies and find the policy that best fits your home. Knowing how much insurance coverage you will need and finding the best policy that fits that need can be stress free and easy.

Prevent yourself from purchasing the wrong coverage and leaving yourself unprotected in the face of a disaster. Do your localized research to find out your home replacement value and double check your insurance company until you know your home will be covered. Don’t wait, protect your home before disaster strikes. ​

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