Why Do You Need Replacement Cost Insurance?

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by: DavidWolf
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Word Count: 510
Date: Thu, 10 Feb 2011 Time: 4:11 PM
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For those who have ever purchased a home, which requires homeowners insurance, you may recognize that there is a difference between the amount you paid for the home and the actual amount of your basic coverage for the home, without belongings.

This is due to the fact that you purchased the house at market value and the insurance company is using replacement cost to determine the cost of reconstructing your house. What is the difference between replacement cost and market value? You may want to make the following inquiry as well "does homeowners cover water damage "?

Market value is simply the price you paid for your home and most often insurance agencies do not give market value a second consideration because the real estate investment market can fluctuate so greatly.

You may have bought your home in 2004 for $220000, and three years later sold it for $290000. This has to do with the demand for homes in the area and the rising costs of real estate, but this doesn't have anything to do with what the actual cost of rebuilding the home would be.

Most often, the cost of building the same house in the same location is the main factor considered by insurance companies. That is how replacement cost is defined. Consequently, if the value of your home has doubled in the past four years, the replacement cost, or cost of reconstruction, will likely be far less than the current market value ascribed to your property.

Similarly, the the market value of your home has declined appreciably, then the replacement cost is likely to be more than the prevailing market value. This is important to keep in mind when contacting your insurance company and this will clear up some confusion regarding insurance rates for various types of coverage.

Keep in mind when receiving estimates from the insurance company that many may give you replacement value insurance coverage costs as well as market value insurance coverage costs, but it is always best to take the replacement value insurance coverage since this is what will be needed to replace your home if a disaster occurs. In addition, keep in mind that the value of the land associated with the property should not be included n a replacement cost quote. You may also want to ask your agent if fair rental value insurance coverage is include in your premium.

Before speaking with an insurance agent, be sure to properly document the square footage of your home and each room, any special amenities that the home has including wood floors, marble or granite countertops, porches, decks or sunrooms, and basements.

The insurance agent will also want to know the type of heating, air conditioning, plumbing and electrical systems installed in the home, as well as the type and number of the various appliances. This can help them to assess how much it will cost to replace these items during the current year of your homeowners insurance policy.

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