You want to base the amount of dwelling coverage in your homeowners policy on your replacement cost. That’s how much you would likely pay to rebuild your home after a total loss. Insurance companies use a replacement cost estimator tool to figure out your estimated replacement cost, but you can also estimate it on your own.
Replacement cost estimator: How to calculate the replacement cost of your home
Start with the square footage of your house and multiply that by the average building costs in your area. For example, let’s say your home is 1,800 square feet, and building costs are $185 per square foot. That means your replacement cost estimate is $333,000, as shown below:
1,800 square feet x $185 per square foot = $333,000
Remember, this is just an estimate, not the actual cost. If you want a more accurate estimate, then you may want to talk to a contractor who can better evaluate your home’s design and building materials.
Factors affecting replacement cost estimates
A replacement cost estimate focuses mainly on the size of your home and the quality of the materials and appliances, but insurance companies can look at several factors. We list some common ones here.
Home features and materials
Two of the biggest factors impacting replacement costs are the materials used in the construction of a home and its design features. Certain materials, say brick versus wood framing or hardwood flooring versus laminate are simply more expensive to replace.
Similarly, special features such as high-end finishes, custom cabinetry, or unique landscaping may also impact repair costs in the event of loss.
Utility systems
Like custom features or costly construction materials, the quality and type of electrical, plumbing, and HVAC systems in your home can influence replacement costs. Upgraded or energy-efficient systems make for a higher replacement cost estimate.
Age and condition of the property
A home’s age and condition can cut both ways. In some cases, older homes may have older systems that are less technologically advanced – and therefore, less costly to replace. But it can also mean you’ll need to invest in upgrades should you have to rebuild. Policies usually only pay to replace with materials and systems of like kind and quality.
Another issue with older homes? Unique or historical features. Replicating these after they’ve been damaged can be very expensive.
Building costs
Individual home features aside, even regional or national trends in building costs can greatly impact the cost to repair a home. Inflation or supply chain issues, for example, can cause the cost of materials to skyrocket, and that can increase the estimated replacement cost of a house.
Likewise, your property’s location influences labor and material costs. For instance, you often spend more in remote locations because getting materials is difficult.
Home size and layout
The square footage of the home, number of stories, and complexity of the layout can significantly influence replacement costs. Larger homes or those with complex designs generally cost more to replace.
Site conditions
Land, accessibility, and any necessary site preparation work, like excavation or grading, impacts your replacement cost.
How to know if you have enough replacement cost coverage
One way to evaluate your replacement cost coverage is to shop for new coverage. Anytime you get a quote for a new policy, the insurer assesses your home’s estimated replacement cost value.
Alternatively, you may be able to order an insurance appraisal. This is where a professional conducts a more thorough review to build a more detailed assessment of your home’s value.
In other cases, you may want to review your policy with your insurance company to ensure they have all available details about your home’s construction and systems. That way they can accurately assess your home’s estimated replacement cost.
Extended replacement cost endorsement
Another way to increase your replacement cost coverage is through an extended replacement cost endorsement. Sometimes called an additional Coverage A endorsement, it provides additional coverage – typically an extra 10% – for unexpected expenses during repairs.
Let’s say your home has an estimated replacement cost value of $400,000, so you buy $400,000 worth of homeowners insurance. Unfortunately, your house burns down. It’s a total loss, so your insurance company sends you a check $400,000, minus your deductible.
While rebuilding, you find that skyrocketing labor costs make the actual cost to replace your house is closer to $425,000. Extended replacement cost coverage can help pay the extra expense.
Guaranteed replacement cost endorsement
One more way to ensure you have adequate replacement cost coverage is with a guaranteed replacement cost endorsement. In this case, the insurer covers the entire cost to rebuild your home, minus the deductible, no matter how much, if the property is a total loss.
Both an extended replacement cost endorsement and a guaranteed replacement cost endorsement require additional premium on the policyholder’s part.
Common mistakes in estimating replacement costs
When you’re estimating the replacement cost of your home for insurance purposes, accuracy is important. You don’t want to be underinsured because then you’d be exposing yourself to considerable risk in the case of a loss. Here are some common pitfalls to avoid:
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Ignoring current construction costs. The cost of materials and labor fluctuate over time. Using outdated cost estimates or old data without adjusting for current prices can lead to you not getting the right amount of coverage.
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Not factoring in property upgrades. If your home has undergone renovations or upgrades, failing to account for these changes can result in an inaccurate estimate. Ensure you include any enhancements made to your property.
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Overlooking unique features. Custom features such as high-end appliances, specialty flooring, or unique architectural details all need to be considered. Ignoring these can lead to a significant discrepancy between estimated and actual replacement costs.
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Inaccurate square footage measurements. Mistakes in measuring the home's square footage can skew the estimate. Ensure accurate measurements are taken and verified.
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Underestimating labor costs. Labor costs can vary widely by region and type of work. Underestimating these can lead to a significant shortfall in the estimate.
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Forgetting about permits and fees. The cost of obtaining necessary permits and paying other regulatory fees should be factored into the replacement cost estimate.
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Ignoring inflation. Construction costs may go up due to inflation. Not accounting for potential increases over time can lead to an underestimate.
Being underinsured can have a big impact on any claims you file. Most insurance policies have a coinsurance clause that requires you to have coverage amounts that are at least 80% of home’s value – and many insurers prefer you cover 100%. Failing to do so can reduce your compensation after a loss.
