Insurance companies often give policyholders two options when they purchase coverage—replacement value or actual cash value. Replacement cost value policies do not factor in depreciation; therefore, they are more expensive. You can calculate this cost manually or use tools such as a replacement cost estimator.
In this article, we will break down the meaning of replacement cost and the different ways you can calculate it. Additionally, we will highlight the importance of calculating this estimate and the factors that may affect the figures.
What Does Replacement Cost Mean?
Replacement cost refers to the estimate or budget to rebuild your home after it suffers irreparable damage. The aim is to rebuild the same quality, size, and structure as your destroyed home. This is unlike actual cash value which is the cost of your home factoring in depreciation. In most cases, you can choose between extended replacement cost and guaranteed replacement cost.
Insurance companies use replacement costs to determine your dwelling coverage limit. However, this estimate differs from the market value of the home. The market value is the amount a buyer would pay for your home in the real estate market. This is not the same amount as the cost of rebuilding which is what replacement cost is.
Why Should I Calculate My Home's Replacement Cost?
Knowing the replacement cost of your home can help you avoid spending money on unnecessarily high premiums. If your home’s market value is higher than the replacement cost, opting for market value coverage will cost you more. This is an unnecessary expense when replacement cost policies can help rebuild your home without paying staggeringly high premiums.
Furthermore, calculating your home’s replacement cost value ensures you have adequate coverage if property damage occurs. If the value is accurate, you will receive adequate financial compensation.
How to Calculate Your Home's Replacement Cost
There are several methods you can utilize to determine your home’s replacement cost. Here are some of them:
Use a Replacement Cost Estimator
A replacement cost estimator is software that does the calculation on your behalf. It may be in the form of an application you need to download or you may use a website. You will need to enter details of your home such as the size, location, type, quality of finish, and special features. The software takes all these details into account to calculate a replacement cost estimate.
You should know that a replacement cost estimator is different from a market value calculator. The latter gives you a figure that is your home’s market value and not the amount it would cost to rebuild your home.
BMT Tax Depreciation Quantity Surveyors have a replacement cost estimator that is free to use on their website. They also give you the option of downloading the application. Zebra also offers a free replacement cost estimator you can use on their website.
Note: These calculators only give you an estimated figure. Your home may have certain features that make it more expensive or less expensive to rebuild and replace. Do not accept the estimator’s figure as fixed and accurate.
Ask for an Appraisal
Licensed appraisers and contractors can help provide a more accurate estimate of replacement costs. While they are a pricey option, they are dependable. They will conduct a thorough inspection of the interior and exterior of your home, documenting all its features. They will then calculate the potential costs of rebuilding your home including the cost of materials and labor.
Use the Insurer’s Estimate
When you are purchasing an insurance policy, your insurer will appraise your home to determine its value. They use this information to determine your coverage and premiums. However, their estimate is based on the details they have. This is because they rarely perform an on-site inspection. Rather, they will request details of your home such as the type of materials used in the building, the number of rooms and bathrooms, and adjoining structures.
Many insurance companies use software to calculate an estimate. Therefore, the figure may not be as accurate as a professional appraisal.
Manually Calculate the Cost
You can always calculate the replacement cost yourself. However, this method often leads to inaccurate figures because homeowners overlook certain factors that affect rebuilding. Nevertheless, to calculate your home’s replacement cost, multiply the local cost of rebuilding by your home’s square footage.
For example, let’s say the local cost of rebuilding in your city is $120 per square foot and your home is 2200 square feet. Your replacement cost estimate will likely be 120 x 2200 = $264,000.
What Factors Affect Replacement Cost Value?
The replacement cost value of a home depends on a number of factors, including:
Size
The total size of your home including adjoining structures such as sheds and garages heavily affects your replacement cost value. Larger homes with a complex layout will have a higher replacement cost value than smaller and simpler homes.
Features
Homes with high-end finishes and fixtures have higher replacement cost values. This is especially so for homes with custom-made windows, stairs, appliances, cabinets, and doors. Customized features can cost double the price of mass-made features.
Building Materials
The type of materials used in constructing your home may be more expensive which also drives your replacement cost up. For instance, brick is more expensive than wood. Additionally, the type of roofing, siding, and foundation your home has affects its replacement cost.
Labor Costs and Inflation
Inflation may increase the local labor costs in your area and this means you will spend more rebuilding your home. This increase will also affect the cost of building materials and equipment. Additionally, if your home is not easily accessible, local contractors would charge you more for rebuilding.
Age
Older homes often have unique features and utilities that may be difficult and expensive to replicate. On the flip side, it may be cheaper to rebuild an older home because it lacks complex technological features.
Conclusion
It is key to calculate your home’s replacement cost value to avoid underinsurance and unnecessary premiums. Modern technology has made it easier to calculate in the form of a replacement cost estimator. You may also outsource the calculation to your insurer or a professional appraiser.
When calculating the replacement cost, keep key features such as your home’s size, age, and features in mind. Ignoring these factors may lead to you guessing the wrong figure which in turn, affects your coverage.
On-Site Adjusting can help you discuss your insurance policy, ensuring you avoid being stranded when property damage occurs. We offer a free consultation for first-timers. Take advantage of this opportunity today!
