We often get asked, “Why is my home insurance coverage amount different from what I paid for the home?”
We will go over a few reasons this might be the case and what you can do to make sure that your home is adequately insured.
Home Insurance Coverage Amount vs What you Paid for the Home
Every insurance company uses a tool to calculate an estimate of what it would cost including labor and materials to rebuild your home in the event of a total loss at today’s prices. This is called the Replacement Cost Value (RCV).
This is not tied to what you can buy or sell your home for. That is called the Market Value which, by-the-way, also includes the value of the land. Your home insurance policy does not include coverage for the land.
RCV will never be the same as Market Value.
RCV is usually only calculated at policy inception and never at renewal. Your policy likely contains an inflation guard, but it is always good to revisit the RCV of your home every 3 years or anytime you have made any improvements to your home.
Most RCV calculators take data that is publicly available from sources like: tax assessor’s websites, MLS listing and/or builder’s website (especially for brand new builds) to calculate your home’s RCV. If you feel that the value is incorrect, you should request a copy of your Replacement Cost Estimate Report from your agent to review that the construction details (from flooring type, to exterior construction type, how many bathrooms, square footage and more) are accurate.
Here’s the deal
The insurance company will use the RCV as the amount of coverage for your dwelling.
Keep in mind that your lender may not require you to increase the dwelling amount to match your loan amount if it exceeds the Replacement Cost Value of your home. It’s important that you collaborate with your insurance agent to ensure the value is calculated correctly and that your agent work with your lender to explain how the RCV was calculated and that it’s adequate.
Here’s how we can help
Leal Insurance Services can help with all of this: If you’re buying a home and want to make sure that your insurance is sufficient, let us have a look. If it’s been more than 3 years since the last time you looked at what it would cost to rebuild your home in the event of a total loss, let us help. If your lender needs help understanding how RCV works, we’re here for them too. Schedule a policy review today or request a quote below.