There's no denying that watching the value of your home increase year after year can be satisfying. Many Americans consider their homes to be a critical part of their retirement plan, so a strong return on investment from real estate is welcome. However, the value of your home, or even the original price you paid, is somewhat less relevant when deciding on your insurance coverage.
If your goal is to keep your insurance premiums under control, you want to avoid unnecessary coverage wherever possible. Over-insuring your home is one way to end up with excessively high rates, and confusing rebuild and market value can lead to paying for more (or less) insurance you need to restore your home after a disaster.
How Rebuild Value Differs From Market Value
When you sell your home, you're doing more than selling a collection of drywall, timbers, and screws. The value of your home includes numerous factors, from its geographical location to the property that it sits on. A natural disaster such as a fire or flood can destroy the physical structure, but it won't impact the less tangible characteristics that contribute to your home's market value.
In other words, the cost to rebuild your home is typically less than the cost to buy the house and property at market value. Of course, the actual difference will depend on local conditions and construction costs. Knowing your house's rebuild value, also known as its replacement cost, is crucial to getting the correct level of coverage for your home.
Determining Your Home's Rebuild Value
Getting a precise estimate for your rebuild value can be tricky. Your insurance company may be able to provide you with the average rebuild cost per square foot in your area. You can also call around to some local contractors to find this amount. You can use this value to get a rough idea of the cost to replace your home, but it won't always provide an accurate estimate by itself.
Remember that many factors can increase the value of your home. For example, a high-end metal roof may make your home more costly to repair when compared to the average replacement cost in your area. If your insurer was unaware of these improvements, or if you added them after starting your policy, your existing coverage may be insufficient to rebuild your home to its current state.
The ideal situation is to have as much coverage as you need to cover your home's replacement cost, but no more. If you suspect your current policy may over or underestimate your rebuild value, it may be helpful to contact your insurer and discuss your options. Tailoring your coverage to fit the rebuild cost for your home is the best way to ensure your insurance costs are a good fit for your specific needs. An agency like Ronald H. Krupa Insurance Agency has more information on this topic.