Why is My Insurance Coverage Higher Than the “Value” of My Home?

One question that we are often asked is, “Why is my insurance coverage higher than the value of my home?” The key word here is “value”. There are a number of different ways to determine a home’s value and each has a different purpose.

Determining the Value of a Home

Assessed Value

The assessed value of a home is used only for property tax collection purposes and is determined by the tax assessor.

Appraised Value

The appraised value is primarily used by mortgage lenders when determining approval of a loan application.

Market Value

The market value of a home is used by real estate agents to price a home for the purpose of selling it on the open market.

Replacement Cost

The rated value that we see most often in the Insurance industry, and the one that we will look at more closely in order to answer the question we first mentioned, is replacement cost.

Replacement cost is the amount of money that it will take to rebuild your home in the same spot, of the same size and quality of construction, at today’s construction and material costs. Depreciation is NOT taken into consideration.

For example, you could have 2 identical homes located in 2 very different geographical areas. The first is located in a thriving suburb while the second is in a depressed neighborhood. Their market values would be very different, but the cost to rebuild and replace the homes would be the same.

Most insurance companies require that a home be insured for 100% replacement cost.

Remember that the purpose of an insurance policy is to protect your assets in the event of a catastrophic loss. This is the reason that you want your home, your greatest asset, to be insured for replacement cost and not the market value. Be sure to check with your agent to ensure that you are properly covered. For more information about homeowner’s insurance, call Ruhl Insurance at 717-665-2283.

Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.