Understanding the replacement cost of your home can help you understand why the replacement value won’t necessarily match the Market Value of your home. When rebuilding a home, contractors must match and work with existing materials, in addition to accounting for skilled labor costs and materials that may vary in price throughout the country. The replacement cost is often higher than the initial cost as changes in economy and inflation adjustments will come into play during a rebuild.
When determining the Market Value of your home, you are determining how much a buyer would pay for the home. This value does not include the cost of the materials or contractors, but it is influenced by the quality of the home, the amount of land, the popularity of the neighborhood and the ease of commuting.
Imagine two identical homes: one built in a major suburban area and the other in an unpopular rural neighborhood. The first would have a much higher market value than the second, but the replacement cost would be nearly identical. If the second home were to be insured by the market value, they would be left with a huge financial burden if the owner needed to rebuild their home.
To help us determine replacement costs for the homes that we insure, we rely on industry experts. For example, when dealing with Chubb insurance products, nearly 120 U.S. in-house professionals – along with approximately 4,000 contractors, restoration specialists and high-end homebuilders – work with your Penny Insurance agent for your benefit. Your cost might differ depending on your region or even within your neighborhood. We do not use national construction averages to calculate the expense to rebuild custom or older homes due to these regional variations.
To make sure your home is valued correctly, we would recommend the following:
- Reappraise your home every 3-5 years to account for market variations
- Have your agent review your policy’s inflation guard to ensure that the projection is aligned with current economic factors
- Update your policy as major remodeling projects or appliance upgrades are completed in your home