The difference between Replacement Cost and Market Value is a simple concept, but oftentimes a hard one to see objectively. Some of our customers don’t like the idea of paying the premium for $250,000 worth of coverage on the home they just bought for $175,000. What they may not realize is that the cost of buying versus rebuilding a home can vary greatly.
A good way to look at Market Value is as the price a consumer is willing to pay for a home. This introduces new, often subjective, factors into the equation. Replacement Cost on the other hand is the objective amount that it would cost to rebuild a home with the same quality of construction at today’s prices.
Of course Market Value is not entirely subjective. It takes into account many of the same factors as Replacement Cost. The square footage and materials used in construction play an important role in both calculations. Consider the following factors that can affect the Market Value of a home without altering the Replacement Cost:
There are also factors that affect Replacement Cost that are irrelevant to Market Value.
Because of these factors, a home’s Replacement Cost is often higher than the amount paid for it. Understanding these reasons can help you realize the need for proper coverage on their home, and help avoid situations in which you're underinsured.
At Grier Insurance, we make sure to calculate the Replacement Cost value for the home correctly. You can have the confidence that you're receiving the right home insurance coverage, at the right price.
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