How to Calculate the value of your Home for Home Insurance Purposes

Calculating the value of your home for home insurance purposes is not as simple as merely estimating a present market value or reporting the amount you paid for the home when you purchased it. Instead, for insurance purposes, the real value of your home is the replacement value – the amount of money which would be required to build an identical home in the event that yours is lost. Your home insurance, according to the Wall Street Journal, “should cover enough to entirely rebuild and furnish your home were it wiped off the map.”

According to State Farm, a leading insurance company, homeowners should “make sure that their home is insured for at least 100 percent of its estimated replacement cost.” They caution that replacement cost is not the same as market value, the purchase price you paid, the cost of the land on which the house was constructed or the value of your mortgage. Instead, they recommend that homeowners pick a replacement value which takes account of real material and construction costs. Although your insurance agent can be of assistance here, essentially it falls upon the homeowner to find an insurance policy that will meet their financial needs in the event of a catastrophe.

State Farm adds that, in fixing the replacement cost of a home, special consideration must be made for “architectural details or unique building materials” which do not appear in the average home and therefore result in an increased replacement cost. These could include elements such as upgrades to the kitchen and bathrooms, a finished (as opposed to unfinished) basement, any additions that have been built onto the original house, and “custom molding or arched windows.” According to the Insurance Bureau of Canada, an adequate replacement cost estimate must include “things that may not be included in the resale value, like the cost and availability of skilled labour, debris removal, and extra expense due to more stringent building codes,” in addition to “upgrades, renovations, and other improvements.”

It is also important to remember that home insurance coverage extends not just to the structure of the house but to all of its contents. Make sure that your home insurance policy is large enough to cover the cost of your furnishings and other belongings – which can be a surprisingly large figure in and of itself.

People with little experience in home construction or real estate sales obviously may have some difficulty estimating a replacement cost for their home. You should consider consulting a qualified real estate appraiser, a building contractor, or both in coming to a decision. You should also be aware of the contractual obligations of your insurance policy. For example, some policies will not cover the value of remodeling or improvements unless the insurance company was notified at the time they were done. You should also be aware of what a standard policy from your insurer does not cover, such as floods and earthquakes. Individuals with especially valuable properties may be interested in special insurance policies known as high-value home insurance.