Insuring a Home Properly

Replacement Cost vs. Market Value:Insuring a Home Properly
Ask an insurance agent, a mortgage broker, and a realtor "How muchinsurance should I have on my new home?" I will guarantee you will getthree different answers. The mortgage broker might say the loan amount, therealtor might say the market value, and the insurance agent, if he or she isdoing their job correctly, will say the replacement cost of the home. Sowho's correct?
In short, it has to be the replacement value for proper insurance protection. Homeowners want enough coverage to rebuild their home if a catastrophe happens. Let's take a look at how an insurance company comes up with this number.
Insurance companies use a computerized "replacement cost worksheet"using historical data of building costs in a given area. This data is compiled by independent companies who do actual surveys of building costs and provide it to insurance companies and others in the construction business.

One of the best known companies providing this information is Marshall & Swift. By plugging in the square footage, year built, number of baths, style of the home, and the home's other amenities into the worksheet, a replacement value is determined. The worksheet also considers the extra cost of rebuilding a home like demolition cost, debris removal, architectural plans, and even environmental costs. The replacement value may be more or less than the home's market value.