Homeowners Insurance: How is the Dwelling Coverage figured?

We want to talk about replacement costs versus market value as it has to do with insurance. I get these questions all the time. It’s a super common thing to be confused about. So we will address it in this article. Just quick definitions of the two different things and what they are we’ll talk about. How replacement cost affects your insurance and then we’ll talk about how market value affects your insurance. Pretty simple and quick just going to lay it out for you. Let’s start with some definitions.

Replacement cost is the amount of money it would cost to actually rebuild your home that means hiring contractors, having drywall put in, framing done, roofs put on, kitchen stuff put in your crawlspace spill probably not in that order but you get what I’m saying. The actual cost of rebuilding your home so if your home were to burn down or be knocked over by a tornado or something like that how much is it going to cost us or cost the insurance company to rebuild your home. That’s the replacement cost and that’s what replacement cost means.

Let’s talk about market value. It’s a completely different thing this is the amount of money your home could sell for in the current real market so if you’re a first time home buyer right now or you’re someone who is buying the home right now. You’re looking at purchasing that home for a certain amount of money that may or may not have any connection with how much it would cost to rebuild that house because the market in your area could be much higher. If there are high demand and low supply of homes then it’s going to be more expensive in your area to buy homes. If there are low demand and high supply of homes then it’s going to be cheaper to buy homes in your area. That side of things the real estate side of things has nothing to do with what it would actually cost to purchase the materials and have a contractor to rebuild your house. That’s a completely different thing.

Market value is what your house is worth on the market if it were to be purchased or you were to purchase it and replacement cost is how much it would cost to rebuild it. So let’s dig into replacement cost because replacement cost is really the most important when it comes to homeowners insurance policies.

On your best short term home insurance cover, you will see a coverage called dwelling coverage or coverage. This is the estimated replacement cost of your home. It’s the amount of money that the insurance company feels it would cost to replace your home and it’s the major driver of the price of your insurance policy. Now there are lots of different things that affect price but this dwelling coverage is based on the replacement cost and is a major factor in the price that you have while replacement costs do vary widely around South Africa. There is a rule of thumb that, a standard home should be insured for and I would say all homes should be insured for at least a one thousand two hundred and fifty rands a square foot.

How to Buy Homeowners Insurance

You can’t be approved for a mortgage without homeowners insurance which will cover you if the tree falls on your home, a guest trips on your stairs and intruder makes off with your valuables and much more. You will need an estimate of the replacement cost of your home and its contents. A visual inventory of your valuables insurance rate quotes, insurers’ strength ratings and an annual policy review from a professional appraiser. A floater policy add-ons for flood, earthquake coverage and extended replacement coverage.

Step 1: A standard policy covers property damage caused by certain disasters. Personal belongings up to a limit personal liability which protects family members from lawsuits related to injury or property damage they may cause others and medical coverage which pays the expenses of non-family members injured on your property.

Step 2: Calculate how much insurance you need to carry. Homeowners insurance reimburses you for the cost per square foot of rebuilding your home not the market value of the house.

Step 3: Figure out how much it would take to replace the contents of your home which you can record by photographing or videotaping them. Consider hiring a professional appraiser to help. A standard policy has reimbursement limits. If you own something particularly valuable that exceeds the limit by a separate policy for it. You’ll have to prove its worth with an appraisal

Step 4: Consider buying additional coverage. Damage from fire and lightning is covered in standard policies but flooding and earthquakes are not. Hurricanes are generally covered but any flooding they cause is not. If you live in an area prone to disasters that cause rebuilding costs to skyrocket you might want extended replacement coverage which gives you an additional 20 to 25 percent over your policy limit.

Step 5: Weigh the pros and cons of a cash value policy which gives you money to replace your belongings – depreciation versus a replacement cost policy which reimburses you for the current cost of replacing your goods. The latter has higher premiums.


Wondering what determines the cost of homeowners insurance?

Here are some factors that may affect your homeowner’s insurance premium. First, consider your types of coverage. Certain coverages, such as dwelling, personal property, and liability, are standard parts of a homeowner’s insurance policy. You may decide it makes sense for you to add optional coverages, as well. Each coverage in your policy has its own limit. A limit is the amount of coverage you purchase and the maximum amount your policy will pay for a covered claim.

The limits you select may play a role in the cost of your homeowner’s insurance. Next, think about your deductible. This is the amount you typically have to pay out of pocket toward a covered claim before your insurance coverage kicks in. If you select a lower deductible, you will typically pay less out of pocket toward a covered claim. However, the overall cost of your insurance premium may be higher. On the other hand, if you choose a higher deductible, your out-of-pocket costs will typically be higher – but your premium may be less. Homeowner’s insurance prices can vary because no two policies are alike. Contact a local agent to get a homeowners insurance quote for the coverages that fit your needs.