Home Insurance: Replacement Cost v. Market Value
I posted a trivia question on my Facebook page: Someone buys a brand new 2,500 sq ft, 2-story single family home. Purchase price $450k, mortgage $400k. How much should their home probably be insured for? (a) $400k (b) $450k (c) $275k (d) assessed value by the county.
In reality, I probably should have included an (e) choice that was “not enough info given”, the choice that always drove me nuts on my math exams in college. But in this case, (e) probably would be the best choice. Second best choice? Surprise…(c).
When you are trying to figure out the correct amount of coverage, the question that needs to be answered is not “How much are the homes selling for in my neighborhood?” but more like “If my home burned to the ground, what would it cost a contractor to rebuild my home on the same land?” So your insurance company should be most concerned about things like square feet of living space, number of bathrooms, type of flooring, age of home, construction type, size of garage, and custom features and less concerned about the market value of your home. Especially in Northern Virginia, don’t be afraid if you buy a $500,000 home and your insurance company only needs to insure it for $325-375k. (Disclaimer: All homes are unique so you should contact your insurance agent with specific questions.)
IMPORTANT NOTE: If your insurance company tells you to insure your home for a certain amount, ask them what happens if your home burns down and it ends up costing more than your coverage limit. Any reputable company will have some kind of “buffer” that covers you so that you’ll only be paying your deductible if you have a claim.
If you would like to know what the replacement cost for your home is, you can contact me at 571-969-3743 and I will do it for free, or you can go online and pay $10 to do it yourself at www.accucoverage.com.