Replacement Cost vs. Resale Value: Know the Difference
When it comes to homeowners’ insurance policies, many people don’t understand why the building limit on the policy may not match the resale value of the home. It’s important to understand the difference between the replacement cost to rebuild a home and the home’s resale value.
A replacement cost building limit on a homeowners insurance policy refers to the amount of money that an insurance company will pay to repair or replace the physical structure of a home in the event of damage or loss. This type of building limit is based on the estimated cost to rebuild the home using materials and labor comparable to the original structure. The replacement cost building limit is typically higher than the actual cash value of the home, which takes into account depreciation and the wear and tear of the property over time.
On the other hand, resale value refers to the amount of money a homeowner could reasonably expect to receive if they sell their home. Factors that can influence resale value include:
- The location of the home.
- The size and condition of the property.
- Any recent upgrades or renovations that have been made.
While the replacement cost building limit on a homeowners policy can help protect the financial investment that a homeowner has made in their property, it does not directly impact the resale value of the home.
According to a report from Marshall & Swift/Boeckh, a leading provider of building cost information, as many as 60% of homes in the United States are underinsured. This means that the building limit on their homeowners’ insurance policy is lower than the estimated cost of rebuilding the home. In the event of damage or loss, underinsured homeowners may not receive enough money from their insurance company to fully repair or replace their home, which can lead to financial hardship and a lower property resale value.
Homeowners need to know the difference between resale value and the replacement cost limit for the building. Work with Gibbel Insurance to ensure that your building limit is appropriate for the estimated cost to rebuild your home!