Getting home insurance is much simpler than it used to be. Years ago your insurance provider would’ve asked you to estimate the cost of rebuilding your home or sent their appraiser to your home sometimes adding days or weeks to a policy quote. Then you’d have to add in the cost of replacing all your belongings to finally arrive at a coverage limit for your home insurance policy and this is what your premium would be based on. Thankfully technology has helped a lot with this process. Now there are computer algorithms that help insurance providers to determine the proper rebuild cost of your home but these are only tools to help provide an estimated cost. Still as a homeowner it’s a good idea to have a clear idea of how much it would cost to rebuild your home. The problem however is finding out a realistic cost.
Type of coverage
To get a clear idea of what it costs and what’s covered in your policy you must first determine what type of coverage is used to determine the replacement cost of your home. In most homeowner policies there are three types of coverage:
- Guaranteed replacement coverage (GRC) means if your home ends up costing more to rebuild your insurance company will pick up the tab. It’s sometimes considered the holy grail of insurance coverage but it certainly comes with higher premiums.
- Replacement cost coverage isn’t quite as comprehensive as GRC, but it also doesn’t come with the higher annual premiums. In this type of coverage there is a maximum policy coverage that’s listed in the homeowner’s policy.
- Finally, a cash-value policy will cover the cost of the house’s replacement cost minus any depreciation or wear and tear. This type of coverage will often require a homeowners spending money out-of-pocket to get a home rebuilt in order to make up the shortfall.
Why does my type of coverage matter?
Your annual insurance premium will depend on what replacement cost your insurance company calculates for rebuilding your home. A lower replacement cost means lower premiums. But don’t be tempted to under-insure —an insurance company will actually void your policy if they find out that you deliberately under-insured your property. Leaving you with no coverage at all or forcing you to pay for a portion of the full claim cost.
But even unintentionally under-insuring of your home can be a problem as the residents of Boulder County Colorado found out six years ago after a wildfire tore through their community. According to Marshall & Swift 64% of these homeowners were underinsured on average by more than $200 000. If you find you’re under-insured you could be forced to make-up any shortfall by paying out of pocket—a costly proposition for most homeowners.
How to figure out replacement cost
To help bring peace of mind it may be necessary to to enlist the help of an appraiser a contractor or to use rebuilding software . While contractors can offer a ballpark cost for rebuilding and software can provide estimated costs an independent appraiser can provide an internationally recognized report including a more precise estimate for rebuilding. For as little as $300 this appraiser’s report not only tells you the home’s value in the current market—also known as the potential selling price of your home or fair market value—it will provide an accurate assessment of how much it will cost you to rebuild your home. Keep in mind these two values aren’t the same. Your home’s reconstruction cost may be vastly different than its market value . Be prepared to pay premiums based on at least 80% of this rebuild cost as this coverage minimum is the industry standard.