Market Value vs. Replacement Cost: What’s the Difference?

The terms market value and replacement cost insurance are often used interchangeably.  However, when it comes to your homeowner insurance, you need to know that there is a distinct difference between the two concepts.

Understanding the difference between market value and replacement cost is key to making sure you have adequate coverage in the event of a loss.  The two terms are easily confused, so here are a few facts to help you make informed decisions about your insurance needs.

What Is Market Value Insurance?

Replacement Cost InsuranceMarket value is the amount your home is worth.  It is influenced by the value of your home, the land on which it stands, location appeal, and the value of other homes in the area.  

The market value of a home may be higher than the replacement cost.  However, this can vary based on location, age of the home, proximity to schools, and other factors.

What Is Replacement Cost Insurance?

Replacement cost is the amount it may take to repair or rebuild your home. Current costs of construction materials and labor are taken into account.  The insurance company reimburses you to rebuild your home as it was, using similar materials.  Your policy limits will determine how much you will be reimbursed.

Your home should be insured based on replacement cost rather than market value. 

This comparison of variables that impact market value and replacement cost may prove useful:

Market Value:

  • Age of your home
  • Square footage
  • Architectural style, features
  • Value of the land
  • Housing supply and demand

Replacement Cost:

  • Age of the home
  • Square footage
  • Construction costs
  • Labor costs
  • Demolition and debris removal costs
  • Architectural style, features
  • Labor and construction supply and demand

Many homeowners mistakenly believe the amount of insurance they need is based on their home’s market value.  This can lead to being overinsured and result in higher premiums.  However, it can also lead to being underinsured depending on the strength of the housing market at the time.

Fortunately, most property insurance companies automatically give estimates for replacement cost coverage based on a home’s square footage and location.  

FAQs About Replacement Cost Insurance

Make sure you understand the coverage before choosing a replacement cost insurance policy.  Here are some of the most frequently asked questions that may help you make an informed decision.

> Is replacement cost lower or higher than market value?

Replacement cost may be lower than market value due to the factors listed in the chart above.  However, due to location and the home’s construction, it may be insured for more than its market value.

In some cases, the cost to rebuild a home can be higher than what the home is worth.  For instance, older homes may be constructed with hard to duplicate materials such as rare stone.  Furthermore, replacement costs can be higher than market value for homes located in rural or remote areas on relatively inexpensive land.

> Does replacement cost affect insurance premiums?

The answer is yes.  A low replacement value will result in a lower insurance premium.  But, if the amount is too low, rebuilding your home may cost more than your coverage limit.

> Is your replacement value accurate?

Since prices tend to rise year by year, the cost of rebuilding your home may increase as well.  So, it’s a good idea to update your insurance valuation once a year. Talk to your insurance company or get a professional appraisal to make sure your replacement value is accurate.

> What are the different types of replacement cost insurance?

The type of replacement cost insurance you have will affect the amount of reimbursement you receive in the event of a claim.  The three types of replacement value coverage are:

  1. Guaranteed Replacement Cost – covers the full cost to replace your home.  Some conditions apply, so talk to your agent.
  2. Actual Cash Value – covers rebuilding or repair costs minus depreciation.  
  3. Specified Limits – reimburses for repairing or rebuilding, up to the coverage limits specified in the policy.

Other levels of replacement cost insurance are available such as Extended Replacement Cost. This is also known as extended dwelling coverage.  It can increase your coverage limits by 25% to 50% to account for high rebuilding costs.

Get Expert Insurance Advice From Sandifer Insurance Agency

Do you still have questions about whether you need replacement cost or market value coverage?  Sandifer Insurance Agency can help if you need further clarification.  We have over 40 years of experience in helping homeowners get the right insurance coverage for their needs.  

Sandifer is proudly located near the historic district of downtown Cheraw, SC, and also serves the surrounding communities.  As a local agency, we strive to excel in customer satisfaction because our customers are our neighbors.  

At Sandifer, we partner with some of the nation’s top insurance companies to make sure you get the level of protection you are looking for.  

Contact us today to get more information about replacement cost and market value insurance.  We will also be happy to talk with you about our other insurance products including automobile, life, farm, or commercial insurance.  


Sources: – Market Value vs. Replacement Cost in Home Insurance

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