Is Homeowners Insurance Based on Property Value?

The amount of home insurance you need, as well as the price of insurance, depends on several factors. Primarily, your home insurance coverage needs should be based off the value of that which you want to insure. For example, the value of your physical home and personal belongings.

Home insurance is not designed to cover your land property, fences and other outdoor, unattached structures. Thus, the value of your land property may not be calculated into the needs of your home insurance policy. Instead, you will want the replacement cost value of your dwelling and belongings insured. 

What is Replacement Cost Value in Home Insurance? 

The replacement cost value of your home is not the same as its market value or the amount you purchased the home for. Instead, the replacement cost value refers to how much it would cost to completely rebuild your home after a disaster, including building and material expenses. You will want to insure your home to cover this cost so that you receive the resources needed to rebuild in case your home is destroyed due to a tornado, hurricane, etc.  

You can calculate your home’s total replacement cost value by combining the value of the home per square foot with the value of its permanent fixtures and amenities. Higher value homes will cost more to insure than lower value homes, although upgrading your home’s amenities can sometimes save you money on home insurance if it improves your safety. For example, making your roof more storm resistant can raise your home’s total replacement cost value, but it can also lower the risk of you filing a home insurance claim due to storm damage. 

How Does Replacement Value Work for Belongings? 

There are two main types of compensation available when looking to insure your personal belongings: actual cash value and replacement cost value. An actual cash value home insurance policy will provide compensation for your lost or damages items after accounting for depreciation. This means that as the value of your objects goes down over time, so does the amount of compensation you can receive from a claim. On the other hand, a replacement cost value policy does not account for depreciation. Instead, this type of policy allows you to replace your original item with one of similar make and value. This type of policy is usually more expensive, but often allows you to replace your items more easily.