There are two key distinctions that every buyer should know when purchasing insurance for their Philadelphia condo or home: “replacement cost” versus “market value.” Here is some helpful info from our friends at Trident Insurance Agency:
Replacement Cost vs. Market Value
Replacement Cost and Market Value are two different things, and it’s important to understand both when you’re a homeowner. The former impacts your home insurance policy, while the latter comes into play when you put your home on the market.
Your home’s market value is the amount for which it would sell in the current marketplace in its current condition. Market value changes and can be difficult to predict, but it’s based on your home’s location, internal and external characteristics, and how the homes are selling in that area.
In most cases, it’s not a good idea to insure your home based on its market value. Your home’s market value might not cover the cost of rebuilding if your house is destroyed by fire or another disaster. Materials and labor may cost more now than when it was built, and special features could be more expensive to replace.
This is how much it would cost to rebuild – or replace – your home if it were completely destroyed.
Why is this figure important? It’s how much you should insure your home for. Replacement cost, or reconstruction cost, coverage insures your home for the cost to repair damage to your home or rebuild it completely at equal quality — at current prices.
Replacement cost calculations can vary depending on the home insurance company you’re working with, but it typically covers plans and permits, labor and materials, and fees and taxes. Land value is not included in replacement value, as it does not factor into the cost to rebuild a structure. Keep in mind that costs for these things at the time of your appraisal will affect your replacement cost value. If supply and demand change, those costs may have increased significantly at the time you actually need them.
Insuring Your Home
You should insure your home based on its replacement cost, not its market value, as the cost of building a home often exceeds its market value. Because it is difficult to predict the future, it’s important to choose a policy to help account for unforeseen circumstances — and to regularly review your home’s current replacement cost in case you need to update your coverage.
Updating Your Policy
Remodeling your home will affect its replacement value, so it’s a good idea to review and update your homeowners’ insurance policy after remodeling. Be aware of fluctuating costs of labor and materials in your area so you can update your replacement cost as necessary. Review your policy annually and update it to reflect any changes in replacement value. (Info provided by Safeco Insurance Company)
If you need help finding the best homeowner’s insurance coverage to fit your needs, email Jessica.Nydick@FoxRoach.com
Fox & Roach / The Trident Group LP
A HomeServices of America, Inc Company and a Berkshire Hathaway Affiliate