Many homeowners are confused as to why their homeowner’s insurance policy limit is listed as more than the market value of their home.
For example, let’s say you just purchased your home a few months ago, and you paid $200,000 for it. Still, when you started the process of purchasing insurance, your agent recommended a policy that covered your home for up to $300,000.
Why would this happen?
It all comes down to market value versus replacement cost — two terms that are important to understand when purchasing homeowners insurance.
How Is Market Value Different From Replacement Cost?
Learning insurance terms is probably not your idea of a good time, but if you know a little bit about some of the most important terms, it can help you immensely when it comes to buying various types of insurance policies.
In terms of a homeowners policy, you’ll definitely need to know what market value is and what replacement cost is. Both of these terms are used widely in the insurance purchasing process, and as such, they’ll come up often.
Before we can discuss the definition of these terms, however, we need to discuss coverage A.
What Is Coverage A?
One of the most important decisions you’ll need to make when organizing your homeowner’s insurance policy is how much coverage A to purchase.
Coverage A is a basic term that refers to the amount you’re planning to insure your actual home for (the permanent structure and foundation). In other words, if your home was destroyed because of a fire, how much would you want to get from your insurance company to pay for your home’s rebuilding? Remember that when we talk about coverage A, we are not talking about coverage for interior “personal property,” which includes things like furniture. Instead, we’re referring to the walls, outer materials, roofing, flooring, and rooms of your home.
Incidentally, this “replacement amount” that you want for your coverage A insurance is actually defined by insurance companies as the replacement cost.
In order to decide on a coverage A amount, it’s a common mistake to simply look at how much you paid for your home or how much you feel you could sell your home for at this moment. The latter (how much your house would sell for on the market right now) is known as the market value of your home.
Determining Your Coverage A Amount
In the first example we gave, the purchase price of the home was $200,000.
Unfortunately, however, this isn’t how much you would insure your home for. You also wouldn’t insure it for whatever you think you could resell your home for.
Instead, you need to look at the replacement cost of your home, which is exactly how much it would cost to replace your home if it were destroyed (or as close as you can get to this amount).
This means you’ll need to make quite a few calculations, all referencing the labor and materials costs of everything that would need to be replaced in your home’s structure. Remember not to include costs and values such as:
- What your home is “worth” because of its specific location in a given town or city, whether it’s close to good schools, etc.
- The value of your plot of land
Other considerations you’ll need to make include:
- Property co-insurance (not the same as co-insurance in a health insurance plan)
- Mortgage requirements from your lender
Get Help With Coverage A
The Harnish Insurance Group can run your numbers for you and help you come up with the ideal amount to insure your home for. Contact us today!