What Are Replacement Costs?

How do I estimate the replacement cost of my new home for insurance purposes?

There’s a lot to learn for the first-time homebuyer. And, just when you think you’ve reached information overload, along comes your new homeowner insurance agent asking you the “replacement value” of your new home.

No, the amount you paid for the home isn’t the same as its replacement value. The latter is the amount of money it would cost to rebuild the home if it were completely destroyed.

You aren’t required to insure your home for replacement costs

Many homeowners who don’t live in disaster-prone areas make the mistake of assuming that insuring their home to cover their mortgage is sufficient.

But, a home fire can happen anywhere. In fact, 75 percent of the nearly 359,000 structural fires each year in the U.S. are residential fires, according to the National Fire Protection Association.

Yet, studies find that nearly two-thirds of homeowners don’t have adequate insurance to pay for damage to their homes.

How to estimate replacement cost...

First, you’ll need to answer questions about your home and the answers to those questions may seem impossible for you to know. After all, you are in the process of buying the home and you have never lived in it.

Ask your real estate agent to get the answers you lack from the current homeowner. For instance, what is the exterior finish of the home and the type and age of the roof?

Here are some tips on where to turn for help in determining replacement cost, offered by State Farm Insurance:

  • Ask if a replacement cost estimate is available when the home is appraised.
  • Consult with a licensed contractor for an estimate (this is often the best option since contractors are familiar with the local prices of various building materials).
  • Ask your insurance agent if he or she can help you determine an estimate.
  • Although not as accurate an estimate as one you’ll receive from a contractor, esurance.com offers a walkthrough of a DIY calculation.

Whichever option you choose, don’t neglect to mention any of the home’s architectural details or any unique building materials used in its construction. These may include:

  • Custom molding
  • Arched windows
  • Finished basement
  • Upgraded features in the bathroom and/or kitchen
  • Marble floors

Things change

It’s the nature of life, so review your policy each year to ensure that your coverage meets your needs. Revisit your coverage after you remodel or improve the home as well and call your insurance company to report changes in a timely manner.

State Farm, for instance, gives policyholders 90 days from the conclusion of a remodel to notify them (if the work performed increases the value of the home by $5,000 or more).

“If it's not built into your policy, ask for replacement cost coverage for your home's contents,” caution the pros at esurance.com. “Without it, you'll end up with just the depreciated value of any object that's damaged ...” And revisit this part of the policy annually and after making expensive purchases.

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