Homeowner’s insurance is an essential, but understanding all of the factors that determine the price of your policy can be difficult. Different policies may become necessary in the scenarios that could occur over the course of your home ownership. Two essential terms that will come up in discussion with your insurance agent are market value and replacement cost. Different factors go into each of these calculations, and it is important to know what each entails.
Read on to learn the differences between market value and replacement cost, so that you can be informed and ready when the time comes to decide what is best for you and your home, no matter the circumstance.
Market value and its policies
Market value — also known as Functional Replacement Cost or a Modified Loss Settlement — is the price at which your property would sell in the current market compared to similar properties on the market. When determining this price, insurance companies take a variety of factors into account, including:
- Location — is the neighborhood desirable?
- The condition of the home
- School district
- Scenery/aesthetics of the surrounding area
- Current supply and demand on the market
Your property will need to be inspected by a licensed appraiser, who will take account of all of these factors in order to provide your insurance company with an accurate understanding of the market value of your home.
Replacement cost and its policies
Also referred to as “reconstruction cost,” replacement cost is the price of rebuilding your home in case of an event such as a natural disaster or house fire. As in the case of market value, a professional appraiser can offer you and your insurance company an accurate estimate of your home’s replacement cost. While land value isn’t calculated into replacement cost, the house materials, labor costs, contractor’s overhead, foundation, etc. are all considered.
As the homeowner, it is important to note that fluctuating supply and demand of necessary materials may alter the price from the original estimate at the time of appraisal. In addition, if your home is custom-built and features luxuries such as elevators, or the use of more expensive materials, it may be necessary to pay more to have these features reconstructed in case of disaster.
Ensuring a safe future for you and your home
As we mentioned, market prices aren’t stagnant — trends in home value according to supply and demand, as well as material and labor costs, mean that the market value of your home at the initial time of appraisal will likely change over time. Because of these ever-changing factors, it could be within your best interest to ensure your home at 100% of its replacement cost at the time of purchase, so that when you get that final stamp of approval you know that your home will be on solid ground.
Learn more about best practices for homeowners and what is most beneficial for your specific insurance needs by speaking to Smyrl Insurance’s team of experts. We look forward to hearing from you!
