Market Value vs. Replacement Cost

Are you adequately covered in the event of fire, flood, or other disaster? Many people think they are – only to find out otherwise, after it's too late.

An estimated two out of every three homes in the United States are underinsured. After reviewing your home insurance coverage, you may find your current policy will only insure a percentage of the replacement value of your home. In the unfortunate event of a total loss, this gap in coverage could lead to significant financial loss.

How Much Home Insurance Coverage Will You Need?

There are two different methods of determining the value of your home when purchasing home insurance: market value and replacement cost.

The vast majority of homeowners are familiar with the market value of their home – how much it's worth on the current market – especially when buying or selling a house. However, you may be shortchanging yourself if you use market value to determine how much insurance coverage you need. Instead, replacement cost – how much it costs to rebuild or repair the home – is a more accurate method of determining the amount of home insurance coverage needed to fully protect homeowners in the event of disaster.  

Market Value

As you know, market value is based on multiple factors, such as house location, size, amenities, supply and demand, nearby comps, and real estate market fluctuations. When you use market value to determine how much home insurance coverage you'll need, you're basing your coverage needs on the market value of your home at the time you're purchasing the insurance.

Replacement Cost

Replacement cost is a more straightforward method of valuing your home when faced with a loss. Replacement cost is how much it will cost to rebuild or repair your home after a covered loss and to restore it to its pre-loss condition using similar materials and quality, at their current price.

This method considers the cost of rebuilding or repairing the home at the time of the loss. When your home insurance coverage is based on replacement cost, you are less affected by the sometimes-crazy whims of the real estate market and dramatic increases in the cost of labor and materials.

Sample Scenario: Market Value vs. Replacement Cost

Although insuring your home based on its replacement cost may be more expensive than going the market-value route, it is the only sure way you will be adequately covered should your home be damaged or destroyed.

Consider this hypothetical: You might buy a home for $200,000 and purchase a homeowner’s policy for the same amount of coverage – although the replacement cost of the home is $250,000.

Should an unexpected insured event (such as a fire) destroy the home, you would be responsible not just for the applicable deductible but also the $50,000 coverage shortfall. Or you may be forced to build a new, lower-priced home due to the coverage gap.

Make Sure Your Home Is Insured for All It's Worth

It is essential that you understand the difference between market value and replacement cost when it comes to home insurance coverage. Generally speaking, a policy based on replacement cost is recommended because it provides more comprehensive protection and coverage in the event of a loss. This ensures homeowners have the financial means to rebuild or repair their home to its original condition after a covered event.

We hope you take this information into consideration when reviewing your homeowners insurance policy. Call Florida Peninsula Insurance Company at (877) 229-2244 or speak with your Florida Peninsula agent to determine whether you need higher limits or additional coverage.

For additional information on home prices and replacement costs, read What Effect Do Falling Home Prices Have on the Replacement Cost of a Home, written by Florida Peninsula President Clint Strauch and published in Rough Notes, a media company serving the insurance industry.

Other blog posts like this

Safeguard your most valuable asset! Learn how to identify and prevent fraud with expert advice from Florida's trusted homeowners insurance company.
Florida Peninsula Insurance Company
November 1, 2023
Protect your rental or investment property without straining your budget. Discover how a specialized homeowners policy, called a DP-3, could work for you.
Florida Peninsula Insurance Company
October 26, 2023
DP-3 policies are ideal for investment and rental property. If you own this type of property in Florida, DP-3 coverage may be what you’ve been looking for.
Florida Peninsula Insurance Company
October 26, 2023