Home insurance replacement cost vs. market value - which is better?


When purchasing a home insurance policy, you should carefully check if your policy terms and conditions contain the replacement cost or the market value provision. These two determine the basis on which any loss to your home will be evaluated in the event of a claim.

Replacement Cost or Market Value - What Is the Difference?

It makes a big difference whether your home insurance policy uses the replacement cost or the market value of the structures or items damaged or destroyed to determine the amount of compensation.

Imagine your house burns down to the ground in a fire.

  • If your policy has the replacement cost provision, your insurer will pay for your house to be rebuilt and all your personal property - restored.
  • However, if your policy has a market value coverage, the insurance provider will pay you the market value of your home and personal belongings, which may not be enough for you to replace all your personal property destroyed by the fire.

As you can see, the gap between home insurance replacement cost and market value can be huge - especially if the depreciation factor is applied.

Insurance adjusters use the "wear and tear" factor to calculate the fair market value of personal property. If, for instance, your two-year-old computer has been destroyed in a fire, the insurance adjuster will deduct certain percentage from the replacement cost of your computer because the item has been in exploitation for some time. As a result, you may get something like 60% of the amount you would need to buy a new computer, which is not what you would expect to receive in compensation.

In order not to end up in a situation in which you are inadequately compensated for any loss to your home, you should add the replacement cost rider to your home insurance policy. Although you will pay some extra dollars in home insurance premiums, having this endorsement is worth every cent.

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