How Insurance Companies Value Your Home for Your Home Insurance
When it comes to home insurance, the higher the cost to rebuild, the more coverage you need.
When you first buy a home, there are WOW factors that make a house valuable to you. You know, those hardwood floors, great school districts, and huge backyards that make you sign on that dotted line.
Insurance companies want to protect your investment, but their criteria for value may be different from yours. Many factors go into determining the cost to insure a home. The weight of each factor can vary from company to company, but the thread that ties most insurance companies together when considering value is the replacement cost of the home.
Replacement Cost Versus Real Estate Valuation
Unlike a real estate valuation, replacement cost does not consider the price of the land. In this case, an algorithm measures the cost of materials and labor it will take to rebuild the home to the specs at the moment before a loss occurs. This value of the primary structure is then used to determine how much a company will cover for detached structures, contents, and additional living expenses.
Read: How Much Homeowner's Insurance Do I Need?
Factors That Determine the Value of Your Home
It may seem that your broker or agent is bombarding you with a long list of question about your home for no reason, but each of the following specs affects the cost to rebuild your home:
Detached structure, mobile home, or townhouse?
Year the house was built
The age of the home will determine if certain upgrades will need to be made during the rebuild—your house may have aluminum siding now, but that isn’t up to code today.
The larger the house, the more expensive it is to rebuild.
Finished or Unfinished Basement
If your basement is finished, the rebuild cost factors in the labor and material to carpet and drywall the basement again
Attached or Detached Garage
Attached garages are calculated as a part of the rebuild cost of the house, but detached structures are valued separately as a percentage of the primary structure’s rebuild cost.
Number of Stories
A simple bungalow with an unfinished basement is less complicated and less expensive to rebuild than, for example, a tri-level split over an attached garage.
Read: Breaking Down Your Homeowner's Insurance Policy, From Coverage A to Coverage E
Number of Bathrooms
How many half or full bathrooms are in your home? Any bathrooms in the basement?
A metal roof with a life-proof warranty may be more difficult and costly to replace than a regular shingled roof.
Exterior Wall Type
If your home is the log cabin of your dreams, the cost to ship in the lumber will be higher compared to contemporary vinyl siding.
The Shape of the House
Square and rectangle-shaped houses are most common and the least expensive to rebuild. L-shaped or other irregular shapes are more costly to build. Often, contemporary homes have custom cutouts and window boxes that may affect the cost to rebuild.
For example, garages, sheds, gazebos, and greenhouses. These are calculated as a separate value than the primary dwelling rebuild cost, but it’s important to mention them as you would likely want them replaced in the event of a loss.
Postal Code Region
Where you live determines the classification of the area. Remote, rural, city and coastal resort towns all have different costs determined by how easy or difficult it is to find and transport materials to rebuild the house.
For example, if you lived in a very remote area that was only accessible in the summer and did not have any construction companies in the area, the cost to rebuild would be affected by having to ship the material and get the workers out to your property to rebuild the house.
If you are unsure of this information, your real estate agent should have some insight. You can also have the home inspected—this process should also verify the plumbing, electrical, and heating information that your broker or agent may also ask you.
How does the Replacement Cost affect your insurance premiums?
All of this information is put into a cost evaluation system that determines the rebuild or replacement cost. The evaluator algorithm that each company uses varies, so if you are shopping around, note what the agent reports as the cost to rebuild the house.
The higher the cost to rebuild the house, the more the insurance premium will be.
However, you never want to lie about the specs of your home just to save a few dollars on your yearly insurance premiums. In the case of a total loss, you need the value of the house to be high enough to cover the mortgage—you wouldn't want to get stuck in a situation where you're stuck paying out your mortgage on a home you just lost.
Read: How Insurance Companies Calculate Your Home Insurance Premiums
You also want to make sure that your house is rebuilt to the same quality that it was before the loss. If you love your double-car garage and sweet finished basement now, so you'll want it back after a loss as well.
Most companies offer guaranteed replacement cost on the home. That means they do not take depreciation of the home into account when determining how much they will pay out in the event of a claim. The qualification for replacement cost varies from company to company and is usually determined by the type and age of the home.
If you feel that the replacement cost is not accurate after your broker or agent has collected this information, you can also get a home evaluation done by an independent third party. The value that this third-party evaluator comes up with can be presented to the insurance company to make sure you’re fully compensated in the event of a claim.
Insurance is about protecting what is most important to you, so it’s important to know these specs and have them on hand when you’re talking to your broker or agent. Buying property is one of the most expensive purchases of your life, so insuring it at the proper value means protecting your financial future.
Written by Kaitlyn Kokoska
Kaitlyn Kokoska is a content writer and ex-Personal Insurance Broker from Edmonton, AB. After dipping her toes in the insurance industry, she realized that client education is the key to financial empowerment. She’s now on a mission to make insurance a more accessible topic. You can find more information about Kaitlyn on her website.
Does Homeowners Insurance Cover Natural Disasters?
5 Keys to Homeowners Insurance for First Time Homeowners
- Will my homeowners insurance cover my car if my garage burns down?
- Can my insurance company cancel my homeowners policy after I file three claims?
- How much homeowners insurance should I purchase?
- Will homeowners insurance cover damage from a nuclear explosion?
- What is not covered by my homeowner's insurance?