THURSDAY, APRIL 22, 2021
When shopping for home insurance, you may come across the term “replacement cost value.” This term refers to several areas of your home, especially regarding home insurance. 
Total Replacement Cost Value of Your Home
The total replacement cost value of your home refers to how much it would cost to completely rebuild your home after a disaster, including building and material costs. You can have this amount measured by an expert or get an estimate through an online calculator using your home’s value per square foot. Keep in mind this is not the same as your home’s market value or mortgage.
It is important to insure your home with at least 80% of your home’s total replacement cost value, although 100% is recommended. This is because of the 80% rule in home insurance.
What is the 80% Rule for Home Insurance?
In home insurance, the 80% rule in home insurance refers to your replacement cost value needs. If you purchase home insurance, it must cover at least 80% of your home’s total replacement cost value. This is because you may not be completely covered after an accident if you have less than 80% in home insurance.
For example, say your home’s total replacement cost value is $400,000. You carry $240,000 in home insurance, which is 60% of your home’s total replacement cost value. A storm sweeps in and causes $30,000 in damage to your home. Since $30,000 is significantly less than the amount of insurance you have ($240,000), you may think that you’ll be covered. Unfortunately, this isn’t the case.
Instead, your insurer calculates how much compensation you will receive based on how much insurance you have compared to how much you should be carrying. With a total replacement cost value of $400,000, your home should have been insured with at least $320,000.
The amount of insurance purchased (in this case, $240,000) will be divided by the amount that should have been carried ($320,000) to calculate the percentage of damages your insurer will cover. In this case, the percentage amounts to approximately 75%--meaning that your insurer will cover 75% of the damages. If the damages to your home amounts to $30,000, this means that the insurer will pay around $22,500, leaving you to cover the remaining $7,500.
If you have any questions about your home’s total replacement cost value, you can have it professionally appraised. Be sure to speak with your insurance agent about getting the right amount of insurance coverage.
Also keep in mind that this may not be the same as the coverage required by your lender. If you have a mortgage on your home, your lender may require you to carry enough insurance to cover the mortgage to protect themselves from financial loss. Consider this requirement when searching for a home insurance policy that is enough to protect your home and meet any requirements you face.
Is Home Insurance Required by Law?
Some homeowners may be surprised to discover that home insurance isn’t generally required by any state or federal law. This doesn’t mean you can or should go without, however. If you have a mortgage on your home, the lender will typically require you to carry enough home insurance to cover your mortgage. Once you pay off your home, you could possibly drop your home insurance coverage, but this isn’t recommended.
If an accident or disaster were to hit your home while it is uninsured, you will be faced with paying 100% of the damages out of pocket.
What Happens if I Cannot Afford Home Insurance?
Home insurance premiums range and some policies can be expensive. However, there are ways to save money on home insurance by shopping around, comparing quotes and asking about discounts. Keep in mind the different factors affecting your home insurance rates such as:
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Coverage limits
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Claims history
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Credit score
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Deductible
Although you should keep a certain limit of coverage according to your home’s total replacement cost value, there are other areas you can save money in regarding home insurance. For example, filing a claim will typically raise your home insurance rates. Safeguarding your home with certain prevention measures such as anti-theft and anti-burglary alarms as well as a weather resistant roof can reduce the risk of a claim and thus lower your home insurance rates.
Shop around and speak with an insurance agent today in order to protect your home for what it’s worth so that you can remain covered no matter what occurs.
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