For most of us, our home is the center of our world. It’s where family and friends meet and where we bring our dreams to life. It’s also one of the most expensive investments you’ll ever make — and so it’s important to make sure it’s protected.
A homeowners’ insurance policy helps cover damage from fire, lightning, windstorms, hail, explosions, smoke, vandalism, and many types of theft. And if you’re forced out of your property because of covered damage, your homeowners’ coverage may also help pay for additional living expenses such as a hotel while the repairs are being made.
But before you secure homeowners’ insurance, make sure you know what you need to do to keep your policy up to date.
What is replacement cost?
Replacement cost is an estimate of how much it would cost to rebuild your home the way it was before a total loss. It’s extremely important that the dwelling coverage figure listed in your policy will cover the costs of rebuilding your home.
Many homeowners incorrectly assume that if a home is insured for its estimated market value, assessed value, or cost to construct new, they’ll have adequate coverage if their home is destroyed.
However, replacement cost is not the same as market value.
When you buy your home, you may initially insure it accurately, but what if you then forget to notify your insurance agent after making significant improvements such as remodeling or replaced appliances, furnace, etc.? These items will often affect a home’s replacement cost.
The bottom line: Make sure your insurance policy will provide the necessary coverage to protect your dreams.
Why is it so expensive to rebuild?
Here are seven factors that can make rebuilding a damaged home more costly than you might expect.
1. Site access
Rebuilding a damaged or destroyed home amid existing structures often means limited access for large equipment due to trees, fences, sheds … the list goes on. If access is difficult, costlier labor may be needed.
2. Site preparation
A badly damaged structure may need to be — sigh — demolished. At the very least, debris from the damage needs to be collected and removed before rebuilding can begin. Either way, professionals will need to prepare the site, and that costs money.
3. Economies of scale
Contractors who build many homes during a short period gain significant volume discounts from material suppliers and skilled workers. When they’re rebuilding or repairing an existing home, these economies of scale might swing out of your favor, resulting in higher rebuild costs.
4. Custom features and materials
Older homes in particular may have custom features and materials that are expensive, if not impossible, to duplicate or acquire today.
5. Inflation rate
The cost of building materials often increases at a higher rate than other products and significantly faster than the general rate of inflation. What it might have cost to rebuild your home even just a few years ago could be vastly different in the current market.
6. Supply and demand
If several homes close by are damaged or destroyed by a natural disaster, local construction costs may rise in response to the increase in demand.
7. Property protection
Any remaining property and personal belongings on the site must be safeguarded against further damage or vandalism. This may require placing some personal property in temporary storage.
Of course, every situation is unique. These recommendations were developed using generally accepted safety standards. If you have questions, your biggest resource is your insurance agent. They can help review your coverage, make sure your policy is up to date, and offer committed support to ensure your home is always fully protected.
