A lot of people have the misconception that the Dwelling Coverage on your insurance policy reflects the Market Value of your home.
For most insurance policies, this isn’t the case at all.
The Dwelling Coverage is an estimate of the Replacement Cost for your home. So what’s the difference?
REPLACEMENT COST is how much it would actually cost to rebuild your entire home. This factors in the cement, wood, drywall, contractors, roofs, furnaces, etc.
MARKET VALUE is what you could sell your house for. This value changes based on the current real estate climate.
HOW REPLACEMENT COST AFFECTS INSURANCE
Dwelling Coverage (or Coverage A) is the highest amount the insurance company would pay to replace your home. This number is based on Replacement Cost and NOT Market Value
While replacement cost varies widely around the United States, a rule of thumb is that a standard home should be insured for at least $125/square foot. The more custom your home is the higher this number will get.
WHAT IF YOU’RE UNDERINSURED?
If your house burns down, the insurance company will only pay the amount of coverage even if that won’t rebuild your home.
However, the best companies offer Extended Replacement Cost or Guaranteed Replacement Cost which creates an important buffer if it costs more to replace your home than you thought.
HOW DOES MARKET VALUE AFFECT YOUR INSURANCE?
It really shouldn’t.
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