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This seems to be coming up a lot lately, and probably with good reason.
" $450,000 to replace my house?!? I bought it for less than that this year!"
PLUS INSURERS are only covering the STRUCTURES...not the LAND.
PEOPLE OFTEN THINK THE VALUE OF THEIR INSURANCE SHOULD BE BASED ON THE SELLING PRICE OF THEIR HOUSE.
This is incorrect.
Insurers are interested in the REPLACEMENT COST, not the MARKET VALUE. Not what someone is willing to purchase your home AND LAND for, but what it was would cost to rebuild it TODAY with BRAND NEW MATERIALS. Today's Home insurance is not based on an Actual Cash Value....most of it is based on REPLACEMENT COST. This means all your OLD STUFF is going to be replaced with BRAND NEW STUFF. (less your deductible and a long ride on an emotional rollercoaster)
Someone buying an 18 year old house for $250,000 is agreeing to buy 18 year old siding, an 18 year old furnace, 18 year old decking....18 year windows....etc. The replacement cost of this same home may actually be closer to $350,000.
The market value when buying a home is heavily weighted on WHERE the home is located. The same structure in different communities may demand very different prices. REPLACEMENT VALUE IS NOT THE SAME AS PURCHASE PRICE.
The increased costs of material hit home for me this past weekend.
I needed to buy some lumber to replace some railing on my deck and 6 lengths of 2x6 came in over a $100.00! I can't imagine the costs of RE-FRAMING MY WHOLE HOUSE.
Insurer's also have the burden of carrying a lot of costs over and above just materials.
They require replacement to be done RIGHT AWAY as they also pay the costs of LIVING EXPENSES for those people out of a home... PLUS they need qualified builders, warrantied work...plus plus plus. Insurers need agreements from contractors to rebuild homes when and wherever needed year round. This is built into the pricing and simply doesn't make it a fair comparison to someone who believes they could rebuild their own home for a lesser Replacement Cost. WHAT'S THE CORRECT VALUE THEN?
Now that we've established the SELLING price of your house is not the same as the REPLACEMENT cost, you may be wondering...whats the right number?
Brokers and Insurers use a number of industry standard programs to calculate replacement values.
Considerations are given to Square Footage, the number of bathrooms, heating type, exterior and interior finishes and more. The more specific you get the more accurate the number can get... but it does vary program to program. The RIGHT number is a bit subjective without having an inspector go through it with a measuring tape. DON'T FORGET ABOUT INFLATION.
There's a good chance that your replacement cost CALCULATION was done when you moved into your house.
Every year at renewal, your insurer moves the value of the building up a few points. Some add 4% a year, some add as much as 6% a year to cover "inflation". It's a reasonable action, since costs DO go up each year....but this can get out of control pretty quickly if you're not paying attention.
If you've been with the same insurer in the same location for the last 5 years
HAVE YOUR BROKER RUN A NEW VALUATION.
That number drives a lot of your insurance premium and you should have updated every few years.
Replacement Cost at 5% inflation without adjustment
Year 1 - $350,000 Year 3 - $385,875 Year 5 - $425,427
Looking at the above, you could be adding a lot of cost to your insurance without realizing it.
Talk with your broker and make sure you feel good about what you're paying for. MD
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