Many homeowners often wonder why the limit on their homeowner’s insurance policy is more than the market value of their home. In some cases, there can be a drastic difference between what you recently paid for your home versus how much insurance coverage you have. It’s just a way for the insurance company to get more premium, right?
Not quite! Keep in mind that market value and replacement cost value are two completely different things. For instance, a 2-story home with 2,000 square feet of living area can have a range of market values contingent on a variety of factors:
- What neighborhood is the home located in?
- What school district is the home in?
- How has the market been for recently sold homes with similar characteristics?
- How is the current inventory of homes in the area?
The answers to these questions, among others, can substantially change the market value of a home.
The cost to build a home is more fixed in nature. The cost of brick, lumber, siding, etc. doesn’t vary nearly as much from one regional area to the next. With that in mind, the cost to build a home in an area where the market values aren’t as strong shouldn’t vary much from areas where the values are higher.
In many situations, the replacement cost of a home is more than the market value because it simply costs more to build homes from the ground up as opposed to purchasing an existing home. Of course there are exceptions, and in many cases this varies by area of the country, but it is not at all unusual to see your homeowner insurance declarations show a limit of insurance that is higher than the current market value of the property.
Having an adequate limit of insurance is crucial in the event of a loss to your home. If you’re still concerned about your limit of insurance, be sure to reach out to your independent agent to review the replacement cost estimate that has been completed for your home. He or she will make sure that your home is properly protected and that your limit of insurance – which may be more than the market value – is correct.