It is quite usual for insurance companies to insure homes for more than the market value. This often poses questions from homeowners “Why is my house being insured for more than it is worth?” Before determining how much to insure a house for though, it must be decided how the insurance company will value the house if there is a claim. One method offered is to value the property at Replacement Cost, which as the name indicates, is intended to pay to replace the property, without regard to the original or current purchase price.
In most circumstances, the Replacement Cost option is going to result in a higher claim payment than if the property was insured at its current value. An insurance company is only obligated to pay up to the limit of insurance; consequently, the house must be insured for more than it is worth. In order to obtain Replacement Cost Coverage, the house will need to be insured for the amount it would cost to replace it.
Most property depreciates in value over time. A DVD/CD player set would not be sold today for the same price it was purchased for ten years ago; it would be sold for less, most likely much less than the original purchase price. A policy containing a replacement cost provision would pay today’s cost of a new DVD/CD player of like kind and quality which would be more than if the policy only paid for the value of the ten-year old DVD/CD player.
On a larger scale, the cost to rebuild or replace an entire house could be significantly more than the house was purchased for or could be currently sold for. Even for a house built this year, the cost to rebuild it very easily could differ from the original cost. There are several factors to consider when making an effort to measure the cost of replacing a house, such as:
- No economies of scale
- Cost of preparing the house to be rebuilt
- Increase in labor costs due to high demand, as in the event of a catastrophic event
- Increase in material costs, possibly due to shortages or discontinued
- Access to the house site may be limited or obstructed
There are numerous methods used to estimate the replacement cost of a house. Some of the factors insurance companies use are:
Replacement Cost Coverage is an option every homeowner should consider. Obtaining this coverage will require the house be insured at the estimated Replacement Cost value, which typically is a higher amount than the market value. With the limit of insurance being higher, the premium will also be higher. Definitely no one wants to pay more for insurance, but the difference in a claim payment could be several thousands of dollars.
- Building materials
- Type of foundation
- Square footage
- Location of the home
- Attached or detached garages
- Number of rooms and baths
To learn more about Replacement Cost or Bryan - College Station Home Insurance contact us at (979) 268-1500 or get a free home insurance quote.