How Much Home Insurance Do I Need? 
Should I use Market Value or Replacement Cost? 

By:  Virginia Kinneman
         Kinneman Insurance

Home InsuranceWhat is Market Value?  Take the current condition of your house and the associated land and what would a likely buyer pay?  Most homeowners think their homes are worth much more than potential buyers may; just ask any real estate agent attempting to sell an overpriced home.  Realistically, the value of any home is what the market determines and includes not simply the brick and mortar but the location, local crime statistics (are you in a safe neighborhood), the associated school district (parents will often pay more to be in a specific positively recognized district), and whether or not the market is flooded with similar homes in that neighborhood.  How large is your lot?  Although the land is not covered by the homeowner’s policy it certainly influences the market value of the home.   

Homes insured for Market value very often leave you at risk providing inadequate coverage. As an example, let’s say you paid and carry coverage for $350,000 for your new home.  Within a handful of years, especially in a hot real estate market, your home would sell for $410,000.  In ten years that same home might sell for $500,000.  If you have not been continually increasing your coverage, you would be out of pocket $150,000 if your home suffered complete destruction in a fire.  As much as we all try to stay on top of our personal and financial affairs, life, our children’s needs, work and community commitments occupy all of our time.  It is easy to overlook reviewing your policy each and every year and obtaining updated appraisals.   

Consider too that if you live in an area that suffers a significant downturn in market prices as was seen in the late 2000’s, the reduced market value of your home may not cover the cost to rebuild.  If your home is 15 years old with a roof the same age, the market value of that roof is only one fourth the cost of a new roof.  Depreciation will be calculated for the finishes, your personal possessions, and any number of building materials that are replaced as a normal obligation of homeownership.  Look about carefully…how old are your kitchen cupboards, appliances?  How old are your windows?  They will be replaced but you will not be getting state-of-the-art products.  You will be given the market equivalent of 15 year old technology. 

What is Replacement Cost?  Insurance agents will tell you that replacement cost gives you the optimal chance to rebuild your home and family life with the least personal financial impact.  Replacement cost only covers the cost to rebuild your home. It does not factor in the mortgage, the home’s market value or the land your home is built upon.  It’s surprising to many homeowners because they review a replacement cost that’s much lower than their home’s market value.  Replacement value is designed to cover rebuilding costs, regardless of depreciation.

You would be wise to carry coverage for 100% of its estimated replacement cost and remember to re-evaluate that cost with any additions or vast improvements you make to the home.  Upgrading hard surfaces from Formica countertops to granite, from worn out carpeting or chipped tiles to hardwood and marble will also increase the value.   If you finish off a basement into a game room or other living space, your home has instantly increased in value as has your replacement cost.  Don’t confuse replacement cost with the balance of your mortgage.  You will continue to make monthly mortgage payments even if your house burns to cinders. 

You need to keep abreast of rising labor and material costs.  No laborer let alone a craftsmen will work for the same wage paid 10 years ago.  Many materials skyrocket with calls for supply and demand, point of manufacturer, newly imposed tariffs and general Trade Wars will drastically increase construction costs.  The best protection you can arrange is a homeowner’s policy that includes an inflation clause automatically adjusting for these cost increases.  Your insurance company will send you a questionnaire from time to time to verify the number and uses of

rooms, the type of surfaces within each room, any additions or large renovations you have made so they can adjust for both inflation and replacement cost.  An inflation clause is especially vital when you have owned your home for many years.  Let the insurance company guide you to sufficient coverage rather than your “To-Do” list.

Replacement cost offers the best protection since the cost of building a home often exceeds its market value and you want coverage that will rebuild your home to the same size and standard.

Other Considerations:

Make a complete inventory of your belongings including serial numbers, the date you purchased all large or expensive items (including appliances and electronics) and the price you paid.  Keep this list where you can access electronically or even on paper in a location outside the home.

Check your policy annually and discuss with your agent an inflation guard clause. 

Video your home inside and out including the appliances, finishes of flooring, tile, cabinets, roofing, additional structures on your property, and mechanical units.

Take out an insurance rider for high value items such as jewelry, furs, silver, & paintings.  Your standard homeowners’ policy will only offer minimal coverage for these items.  If all is lost, you may not (most likely will not) have sufficient coverage to replace.  Periodically, you will need to have your jewelry formally appraised with a certificate of appraisal sent into your insurance company.  Keep a record and photos of your silver including the manufacturer, pattern, number of place settings & other serving pieces along with all other silver items such as trays, bowls and casseroles. 

Kinneman Insurance



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