Florida residents know the importance of having a good homeowners insurance policy. Hurricane, fire, flood and other types of property damage claims are common with Florida’s weather.
When you are purchasing homeowners’ insurance, knowing the difference between replacement cost and market value can help you make the right decision when selecting a policy.
Replacement cost
Replacement cost is exactly what it sounds like – the cost to replace or repair your entire home. If your home is insured for its estimated replacement cost, the insurance company will reimburse you for the cost of repairing or rebuilding your entire home.
The exact amount you receive for your replacement cost depends on factors such as the size or type of structure of your home. You can estimate the replacement cost of your home by having a professional replacement cost estimate done. This estimate only includes the cost of replacing your home. It does not include the value of any land your home sits on.
One of the primary benefits of replacement loss is it provides you with the best chance to replace or repair your home to its previous state with little financial risk.
However, the replacement cost of your home can change over time, so if your insurance policy covers replacement cost, you should review your policy yearly to make sure the replacement cost is still accurate. For example, if you remodel a section of your home, the replacement cost may increase.
Market value
Market value is the amount a buyer would pay to purchase your home and any surrounding land you own in its current condition. There are many factors considered when determining the market value of your home outside of the cost to replace the home itself.
Although this is a factor considered, similar homes in the area, local crime statistics and proximity to amenities, such as good schools, are other factors that play into a home’s overall market value.
Market value is often less than replacement value. The advantage of insuring your home for market value is that you will likely pay less for a homeowners’ insurance policy.
But this may cost you if your home is damaged or destroyed. You may receive compensation for your home’s market value but the cost of replacing your home might be more. You then need to come up with the difference to replace your home or build or purchase a less expensive home.
Know your rights under your policy
Regardless of what option you choose, your insurance company has a duty to work with you and act in good faith, paying you what you are owed pursuant to your policy coverage.
When you file a claim with your insurance company after damage or loss, remember to review your policy carefully to ensure you understand your rights and what you are entitled to. Additionally, document all conversations with your insurance company and a record of every written communication.