Editor’s Note: This is the third of a three-part guest post series. I asked David Jenkins, who last wrote here about vacant homes and homeowners’ insurance, to answer three common questions that homeowners have.
What’s the relationship between the sales price and replacement cost of the home?
Many homebuyers make the mistake of thinking that however much they are purchasing a home for, that’s how much insurance they should carry. However, the sales price includes the value of the land, location, etc. All of those things are uninsurable. If the home burns down to the ground, the land is still there and you still have the location.
What a homebuyer really needs to worry about is how much it would actually cost to re-build the home. If someone buys a home for $250,000 and the replacement cost is $200,000, the insurance company is not going write a check for an extra $50,000 just because it was insured for $250,000. This is very important in order to receive an accurate quote and to understand your home policy.
The appraisal can be used as a source for the replacement cost as many times it separates the rebuilding cost from the value of the land and so forth. If that is not an option, some insurance companies use various tools to calculate the replacement cost based on the details of the home. Either way, it’s important to talk with your agent to make sure you understand what the replacement cost is based on and why it’s different from the purchase price.
Part One – Who Handles the Claim?