Insuring for more than the purchase price of a home may be recommended when the home has unique features such as a slate roof, plaster walls, or intricate molding or woodwork. “If I paid $500,000 for my home, why would it cost $600,000 to replace it?” This often leads to questions regarding how valuation scenarios are determined. Valuation ScenariosĪlthough there are various factors that go into determining the insured value of one’s home, purchase price is often not the most important variable. It’s important to talk to your insurance advisor regarding your policy details and stipulations. If you have financed the purchase of your home, your lender will likely require that you insure your home for at least the amount of your mortgage. If you are insured for less than that at the time of loss, you may receive an actual cash value settlement - which factors in depreciation related to the property’s age and condition - or be required to pay a proportionate share of the loss. Most policies require that you insure your home to at least 80% of the amount of rebuilding cost in order to get a replacement cost settlement. This provision will pay beyond your policy limit should the amount at the time of loss not be adequate. When you insure your home to 100% of its replacement cost value, some insurance companies will offer the benefit of extended replacement cost. Also, some insurers may provide only functional replacement cost, which may not cover the cost to rebuild your home with materials of like kind and quality.
#Functional replacement cost full#
However, if you don’t insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss. Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage.
Working with an insurance advisor to navigate your home valuation considerations will help eliminate confusion and help ensure an appropriate settlement in the event of a loss. 1 This means that if there is a total loss, such as a fire, the homeowner may find they are responsible for a significant portion of the rebuilding cost. Studies show that nearly 60% of homes in the US - that’s two out of every three - are underinsured by at least 18%. However, for what is likely your most valuable asset, it’s worth taking the time to consider your coverage options and determine the right amount of insurance for your home.
Obtaining insurance for your home is a basic part of homeownership and a decision that often happens quickly during the closing process.
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