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Insurance to Value Ratio

In homeowners insurance, the insurance-to-value ratio is the ratio of your dwelling coverage limit divided by the replacement cost of your home. This ratio is usually represented in percentages.

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The insurance-to-value ratio is a concept that most people don’t know anything about, but it can become a major factor in a homeowner’s covered claim settlement with the insurance company. The insurance-to-value ratio is essentially the dollar amount of dwelling coverage the homeowner has divided by the property’s replacement cost.

Insurance providers will use the insurance-to-value ratio to determine just how much they will pay out to a homeowner in the event that covered damage occurs. If this ratio is lower than 80%, it could lead to a significantly lower payout to the homeowner. 

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Key facts
  • The insurance-to-value ratio takes into account how underinsured the homeowner is compared to the replacement cost of their home.
  • If the ratio is under 80% of the home’s replacement cost there could be significant penalties or reductions in the amount the insurance company will pay out to the homeowner even if the amount of damage is below the coverage limit.
  • There may be coinsurance clauses written into an insurance policy that will go into effect if a covered claim occurs and the homeowner has under 80% of their replacement cost insured.

What is the insurance-to-value ratio?

The insurance-to-value ratio or ITV for short is a rule used by insurance companies to properly protect themselves and price insurance premiums for a homeowner. In many instances, an insurance company will require the homeowner to get enough dwelling coverage to cover at least 80% of the replacement cost of the home. If for some reason a homeowner does not reach at least 80% of the replacement cost value of their home, insurance providers may implement a coinsurance policy to further protect themselves since the homeowner is not holding up their end of the deal to the full extent that they should. This ratio gives insurance companies a way to standardize their assessment of each individual home in every circumstance as each situation is unique with no two policies being exactly the same. 

When the insurance-to-value ratio is 80% or above, the ratio doesn’t really matter at all as most companies will pay out the full claim amount up to the policy limits stated. On the other hand, when the ratio falls below the 80% threshold then the actual ratio becomes quite important as insurance providers may then use the actual percentage that is below the threshold to determine the dollar amount that they will pay out to the homeowner accordingly. Examples will be given in the calculation section below.

The insurance-to-value ratio calculation

The calculation to find the insurance-to-value ratio is actually quite simple. The formula is simply the amount of dwelling coverage the homeowner has divided by the replacement cost value of the home. Once that is determined, multiply the answer by 100 to get the percentage.

Let’s take a look at an example for each of the scenarios that may occur. First, let’s say a homeowner buys a home that has a replacement cost of $250,000 and they go to the insurance company and get $250,000 worth of dwelling coverage. Plugging that into the calculation, the homeowners insurance to value ratio would equal ($250,000 / $250,000) x 100 = 100%. In this scenario, the homeowner would be fully covered if damage were to occur.

Now some years go by and multiple factors lead to the home now having a replacement cost of $400,000. The homeowner failed to update their policy to this new amount leaving their coverage at $250,000. Now the homeowner’s ITV would equal ($250,000 / $400,000) x 100 = 62.5%. The homeowner has now fallen below the 80% threshold, which can lead to problems if damage occurs. 

Let’s say that a fire breaks out in the home and ends up causing $100,000 worth of damage to the dwelling. The formula that insurance companies will use to calculate how much they will pay out to the homeowner is: the dollar amount of damage x the ITV of the homeowner. Going off the example above the calculation in this case would be $100,000 x 62.5% = $62,500. As you can see, even though the homeowner has a $250,000 coverage limit, which is more than enough to cover the $100,000 worth of damage, because their ratio was below the 80% threshold the insurance company will pay the homeowner less than the total amount of damage repair cost. This can leave the homeowner on the hook for quite a bit of repair costs. 

Another subtraction is the deductible. In each case a covered claim occurs, the deductible state in the policy will be subtracted from the total payout.

The coinsurance penalty

A coinsurance penalty is basically the amount of difference in coverage that an insurance provider will pay out to the homeowner when their ITV ratio is below 80%. In the example above, the coinsurance penalty would equate to $37,500 ($100,000 – $62,500). This huge penalty that could easily be avoided by regularly updating one’s home insurance policy to accurately reflect the replacement cost value of their home.

Another way the insurance company may penalize the homeowner for not keeping an adequate ITV ratio is by using the actual cash value basis instead of the replacement cost basis. Actual cash value reimbursements take into account depreciation over time, which can lead to a significantly lower payout over time.

The 80/20 rule

A simple way to remember what your ITV should be is to think 80/20. If you maintain at least an 80% ITV ratio you will be paid out the full amount of the claim up to your policy limits, below that and the amount paid out will be lower.


The insurance to value ratio is an important yet little know ratio by homeowners that insurance providers use to determine how much they will pay out to a homeowner in the event of a covered claim. The homeowner making sure that they keep their ITV ratio at 80% or above is crucial to them being paid out to the fullest extent possible. Falling below that 80% ratio can open the homeowner up to the large out-of-pocket cost for a covered peril.

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Kyle has extensive background in financial planning and financial writing. He is an expert in home, auto and life insurance. Kyle holds a Bachelor's degree in Business Administration from San Diego State University and multiple financial planning designations.
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