The real estate market has been on a wild ride in recent years. Much of what we hear in the news and statistics related to “housing values” and their effect on the economy. No doubt, this has been both a challenging and interesting time!

In addition to home values, housing materials and construction costs have skyrocketed. 

When it comes to insurance, you might wonder if your homeowners insurance is still providing the right level of protection.

The answer, of course, will depend on your specific homeowners policy and the limits of coverage you carry. One factor that makes a big difference is whether your home is insured using actual cash value, market value or replacement cost.

What is Actual Cash Value?

Actual cash value is a way to determine the value of your damage using the cost to rebuild minus depreciation. This valuation method accounts for the age and wear and tear of the property.

What is Market Value?

The market value of your home is based on what your house and land would sell for on the real estate market. It’s essentially an estimate of how much your home is worth today if you purchased it from a willing seller.

A home’s market value is based, in part, on the size and condition of the house. But it’s also influenced by several other factors — including your neighborhood, school district, and the overall real estate market in your area.

What is Replacement Cost?

A homeowners policy based on replacement cost means your home is insured using an estimate of what it would cost to repair or rebuild your home with materials of like kind and quality. Unlike market value, replacement cost is not dependent on similar home selling prices. Instead, replacement cost is calculated on factors like the cost of building materials and construction contractors.

What’s the Difference Between Market Value and Replacement Cost?

Here’s an example to help you understand how these two types of coverages would play out in the event of a claim.

Let’s say your home has a market value of $100,000. But at the current rates of construction and materials, it would cost $250,000 to rebuild it in the event of a total or significant loss — like a fire or natural disaster. If your home was insured using its market value, you could be left with a $150,000 coverage gap. In this case, your options could be severely limited.

What to do?

With the crazy housing market and the cost of building materials spiking, it is an opportune time to review your policy with your agent to discuss your options.
Give us a call at 607-324-7500  and we would be glad to walk through alternatives with you!

For more information about How Much Will I Get Paid if My Home or Property is Destroyed,  and why it is critical you make smart choices before it is too late, see part 2 of our Blog Post.