Should My Insurance Cover Market Value or Replacement Cost?


When you’re insuring your home, you may have the option of selecting between insuring your property for market value or for replacement cost. Which is the right choice? The first step to answering this question is to understand the difference between the two terms.

Market value is the amount someone would pay to buy your property (home and land) in its current condition. This cost could be higher or lower than the cost to rebuild your house if it were destroyed, and it can easily fluctuate based on factors that have nothing to do with construction costs. For example, things like whether you have a good local school down the block or whether houses are in high demand in your neighborhood can drive prices up or down.

Replacement cost is the amount necessary to repair or replace your home if it is damaged. This should be assessed based on the size of your home, the type and quality of materials used in its construction, and construction costs in your area. This figure can change over time if you remodel or otherwise update your home or if labor and materials costs increase in your area. Anticipated costs for insurance purposes can include demolition and debris removal, permits, material, labor, and other associated construction expenses.

Now, you should consider why having homeowner’s insurance is important in the first place. In the case of a natural disaster or accident, repair costs on your home can mount quickly. In the worst-case scenario, you might have to replace your home from the ground up. The point of having insurance is so that you can rebuild your home to the size and quality it was previously if the worst should happen without being wiped out financially. You want to be sure that your insurance policy is up to the job.

Therefore, it makes the most sense to insure your home for replacement value. While the market value of your home might exceed its replacement cost at times, there’s no guarantee that will always be the case, even in currently hot housing markets. For example, homeowners all over the country saw their home values plummet in the last recession as supply grew and demand dwindled. You don’t know when you’ll need insurance, so you can never be sure when a market-value policy might come up dangerously short. In addition, you should regularly review your policy with your insurance agent to ensure that your level of protection is keeping pace with costs in your area and any improvements you’ve made to your property. This way you can be sure that your policy will fulfill its intended purpose.

A well-tailored insurance policy can give you peace of mind, knowing that you’ll be protected in case of catastrophe. The experts at Stearns and Co. can help determine the correct coverage for you. Contact us today for a consultation.