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Replacement cost vs. market value

  • Replacement cost: The amount needed to rebuild it as it exists (same features, quality and location).  This value is not the same as market value, which reflects your home's purchase price if sold. 
  • Market value: A home's market value is influenced by things such as neighborhood desirability (quality of school systems, tax rates, community services, etc.) and land value.

Why is Replacement Cost Important?

A home's market value and replacement cost can differ significantly. If you have a loss, your insurance pays to rebuild your home, not buy a new one.

  • Example: A home that cost $175,000 to rebuild in California might sell for $285,000; while a home that costs $175,000 to rebuild in Texas might sell for $120,000.  The cost to construct the home in either location is $175,000, so the home should be insured for $175,000.

How is replacement cost determined?

  • The survey: Insurance companies typically use a formula that considers the physical features of your home (such as square footage, building materials, etc.) and the cost of construction labor in your area.  This is why a survey is important; it allows the insurance company to make the most accurate assessment possible.
  • Rebuilding costs: The cost to rebuild your home may be more than the cost to build it originally.  This could be due to several factors, such as availability of materials originally used, changed building codes that may require updated, more costly materials, or even availability of skilled craftsmen to duplicate unique features.

To ensure adequate protection for your home, base your home's insurance amount on its replacement cost, and rely on a thorough, professional survey of your home to determine the accurate replacement cost.  Remember to notify your agent if you make additions or changes to your home.


Contact a Westfield independent agent today to review your current insurance and look for gaps in your coverage.
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