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.