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Replacement Cost VS Market Value | How building insurance is figured - YouTube
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hey this is Jeremy from shine insurance
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in this video is about replacement costs
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versus market value as it has to do with
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insurance I get these questions all the
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time it's a super common thing to be
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confused about we're going to uncommon
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topic so we will address in this video
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just quick definitions of the two
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different things and what they are we'll
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talk about how replacement cost affects
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your insurance and then we'll talk about
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how market value affects your insurance
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pretty simple pretty quick just going to
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lay it out for you let's start with some
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definitions replacement cost is the
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amount of money it would cost to
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actually rebuild your home that means
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hiring contractors having drywall put in
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framing done roofs put on kitchen stuff
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put in your crawlspace spill probably
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not in that order but you get what I'm
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saying the actual cost of rebuilding
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your home so if your home were to burn
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down or be knocked over by a tornado or
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something like that how much is it going
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to cost us or cost the insurance company
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to rebuild your home that's the
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replacement cost and that's what
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replacement cost means let's talk about
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market value it's a completely different
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thing this is the amount of money your
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home could sell for in the current real
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market so if you're a first time home
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buyer right now or you're someone who is
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buying the home right now you're looking
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at purchasing that home for a certain
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amount of money that may or may not have
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any connection with how much it would
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cost to rebuild that house because the
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market in your area could be much higher
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if there's high demand and low supply of
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homes then it's going to be more
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expensive in your area to buy homes if
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there's low demand and high supply of
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homes then it's going to be cheaper to
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buy homes in your area that side of
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things the real estate side of things
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has nothing to do with what it would
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actually cost to purchase the materials
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and have a contractor to rebuild your
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house that's a completely different
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thing market value is what your house is
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worth on the market if it were to be
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purchased or you were to purchase it and
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replacement cost is how much it cut
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would cost to rebuild it so let's dig
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into replacement cost because
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replacement cost is really the
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most important when it comes to
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homeowners insurance policies on your
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homeowners insurance policy you will see
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a coverage called dwelling coverage or
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coverage a this is the estimated
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replacement cost of your home it's the
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amount of money that the insurance
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company feels it would cost to replace
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your home and it's the major driver of
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the price of your insurance policy now
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there's lots of different things that
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affect price but this dwelling coverage
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is based on the replacement cost and is
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a major factor in the price that you
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have while replacement costs do vary
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widely around the United United States
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there is a rule of thumb that that a
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standard home should be insured for and
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I would say all homes should be insured
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for at least a hundred and twenty-five
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dollars a square foot now really does
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depend on where you live how accessible
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materials are how accessible building
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your your home would be if you're in the
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middle of a big city and something bad
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happens it's a lot tougher to rebuild
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that house in that space than it would
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be if you're in a suburban neighborhood
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or something of that nature but $125 is
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kind of the bottom side of what I would
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expect your replacement to be a hundred
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and twenty-five dollars per square foot
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if you have a much nicer home a custom
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home you may see two hundred two hundred
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and fifty dollars a square foot encima
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it obviously goes up as you have more
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custom finishings if your home is a
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custom home it's going to cost more to
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rebuild than if it was a standard home
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built you know in a neighborhood that
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was all built at the same time or
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something like that so somewhere between
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125 and 200 dollars a square foot
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depending on the quality and custom
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nature of your home so here's an example
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if you own a fairly standard home with
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1,500 square feet and you can just
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multiply that 1500 times 125 and you
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would figure that your dwelling coverage
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should be somewhere around a hundred and
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eighty eight thousand dollars now you
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should definitely talk to your insurance
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agent and ask them if you'd like for
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them to to show you the replacement cost
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estimate that that they created
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I'll talk real quickly about request
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replacement cost estimates though they
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have very general information so
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generally when you look at a replacement
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cost estimate it has a lot of
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misinformation like it'll say 70% of
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your houses is a carpet when really a
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lot of it is hardwood or something like
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that we don't know everything about your
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home
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we haven't walked through your home most
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of the time and so we're we're
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generalizing we're getting very general
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information about your home and coming
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up what we feel as a replacement cost
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and hopefully that is pretty close and
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some of these numbers can help you
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figure that out but you can't ask an
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insurance agent to show you the
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replacement cost estimator that they
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created and they should be able to
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provide you that for you so what if you
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under insure your house what if you
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insure your home for less than the
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actual replacement cost well if your
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house burns down or is hit by a tornado
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or something like that the insurance
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company is only going to pay the
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dwelling coverage the limit of liability
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on that coverage a-line so if they're
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rebuilding your house and they run out
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of money because they ran out of that
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coverage they're going to stop even if
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it's 75% done and you're going to be
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stuck paying for the rest of building
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rebuilding your house in that situation
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unless you have one of two different
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kinds of coverages that I think are
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awesome and great companies always
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provide which is extended replacement
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cost or guaranteed replacement cost
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these two endorsements to an insurance
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policy or additions to an insurance
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policy give you some extra coverage
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extended replacement cost is often 25%
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more than what your dwelling coverage is
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guaranteed replacement classes even
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better than that so essentially these
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coverages build in a buffer so that if
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your number is wrong and you have to
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rebuild your house the insurance company
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is going to pay even more than the
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actual dwelling coverage the most common
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example of that is if a tornado came
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through and took out 40 or 50 homes in a
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town what would happen to the price of
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wood in that town well likely the price
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of wood would sky skyrocket because the
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supply would be lower than the demand in
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that situation suddenly to replace your
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home it's going to cost a lot more money
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than what we thought it would be in a
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normal situation this is why having
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extended replacement cost or guaranteed
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replacement cost can
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really help you out even if you have
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your replacement cost figured correctly
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on your insurance policy so make sure
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your policy has one of those two options
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on it and like I already said it
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provides extra coverage if your
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replacement cost estimate isn't correct
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or if the price of materials changes
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because of some situation like a tornado
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taking out a lot of different properties
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at the same time let's talk about how
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market value affects your insurance
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policy well frankly it really shouldn't
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have anything to do with insurance
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market value and insurance are not
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really related to each other at all
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insurance is all about replacement costs
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what it would cost us to replace your
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home market value has nothing to do with
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it but occasionally there are some
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scenarios where market value will play
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into your insurance policy if your
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mortgage is for more than the
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replacement cost of the house so market
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value in your town is higher than it
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would actually cost to replace your
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house a lot of times the mortgage
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company will require that the insurance
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company raises the coverage and this is
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kind of a bummer because in the end that
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coverage wouldn't be used because again
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market value has nothing to do with
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replacement cost but oftentimes a
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mortgage company will make you cover the
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amount you've borrowed from that
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mortgage company on your insurance
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policy whether it actually reflects the
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replacement cost or not so that's one
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time that market value could come in to
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your insurance policy another is
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sometimes you buy houses for way less
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than the replacement cost if you have a
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town where market value is very low you
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know fifteen hundred square foot have
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1500 square foot house is going to cost
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around 125 to route 125 dollars a square
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foot to rebuild no matter what the
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market value is in your town so when
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market value is low oftentimes people
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feel like well I bought this house for
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$80,000 why do you want to insure it for
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$200,000 and the answer is because we're
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not insuring for market value we're
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insuring for replacement cost but in
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some scenarios you really have to be
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careful with these kinds of policies and
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make sure you understand but there are
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policies out there that can insure for
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less than a replacement cost
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you just have to know it's not going to
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rebuild your house if your house were to
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burn down you are only going to get the
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limit of liability that you put on the
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insurance policy it's not going to
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completely rebuild your house but if
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that's something that you want and
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you're comfortable with and there
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certainly are policies out there all
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right so what we address in this video
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we talked about the quick definitions of
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replacement cost versus market value
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hopefully you know the difference now
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and you're super clear on that we also
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talked about how replacement cost
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affects your insurance and how market
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value affects your insurance as well so
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you want some more three awesome places
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I'd love to see you go here first is our
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new home buyers guide if you go to the
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shine Channel it's a playlist lots of
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videos in that playlist it also has a
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complete course behind it if you want to
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check that out as well at new homebuyers
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guide net another video that recently we
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put out is the five reasons a homeowners
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claim could be denied it's a great video
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to watch early on in the process so you
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understand how homeowners insurance
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policies work so that you don't get
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burned in a claim situation and finally
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if you have insurance questions or you'd
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like to consider getting insurance from
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shine check us out at WWE insurance com
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and as always the very last steps in our
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video please if you haven't done so
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already press that subscribe button
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right below the video we'll get great
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content out to you about new home buying
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finances and of course insurance and if
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this video helped you and you think it
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could help others please go ahead and
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share it and make sure that other people
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can enjoy it and learn from it just like
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you have I always say good information
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is only great when it's shared with
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others until the next time have a
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wonderful day
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