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Home > Blog > What's the Difference Between Market Value and Replacement Cost
TUESDAY, JUNE 30, 2020

What's the Difference Between Market Value and Replacement Cost

When purchasing your first home, you'll need to make lots of choices. But in addition to choosing how many bedrooms and bathrooms you want, many of the choices you'll have to make concern home insurance. One of the most important of theseHo,me front choices? Exactly how much to insure your home for. Let's go over how to make this decision. We'll help you understand the difference between market value and replacement cost coverage. 

Defining the value of your property 

There are many different types of home insurance policy options to choose from. When choosing home insurance for your first home, the most pressing question will be how much you want for your coverage A amount. 

Coverage A is sometimes called dwelling coverage. It's basically another way of saying how much you would receive from your insurance company if a covered hazard were to occur, and it destroyed your house. 

For example, let's say fires are a covered event under your insurance policy (as they typically always are). A fire levels your home completely to the ground. In this situation, how much would you want to receive from the insurance company to rebuild your home? 

Whatever your desired amount is, this is how much you should insure your home for. 

Market Value Vs. Replacement Cost 

Here’s where the terms market value and replacement cost come in. 

When choosing a coverage A amount, first-time homeowners often make the mistake of thinking that their coverage A amount should be equal to the market value of their home. Instead, your coverage A amount should be more like the replacement cost of your home. 

  • The market value of your home is how much you could sell it for if you listed it right now and made a fair sale. If you're about to buy your home, the market value will (probably) be the sale price that you're about to pay. 
  • The replacement cost of a home is how much it would actually cost to replace it. 

The replacement cost of the home is almost always higher than the market value. If you choose to insure your home for its market value, you are under insuring your home. 

It is understandable if these terms confuse you when choosing a coverage A amount. That’s why your best option is always to speak to a home insurance agent to choose the exact insurance amount for the full protection of your home. 

Posted 5:34 PM

Tags: home insurance
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