When people decide how much home insurance to buy, they often start from what their house is worth — its market value. But home insurance is not meant to pay you what you could sell the house for. It is meant to pay to rebuild it. Those two numbers can be very different.
Market value vs. replacement cost
- Market value is what a buyer would pay for your home today. It includes the land, the neighborhood, the school district and local demand.
- Replacement cost is what it would cost to rebuild your home with similar materials and quality, at today's labor and construction prices.
Land does not burn down and does not need to be rebuilt, so it is not part of your dwelling coverage. In areas where land is expensive, market value is often much higher than rebuild cost. In other areas, rising construction costs can push rebuild cost above what the house would sell for.
Insure the dwelling for its rebuild cost
Your dwelling coverage limit should reflect the full cost to rebuild — not your purchase price or your mortgage balance. Carriers estimate this from details such as square footage, construction type, roof, number of stories and finishes. Make sure those details are correct; an outdated or incomplete description can leave you underinsured.
Options that protect against rising costs
- Extended replacement cost pays a set percentage above your dwelling limit if rebuilding costs more than expected — for example after a major storm when local contractors are in demand.
- Inflation guard raises your dwelling limit automatically each year to keep pace with construction costs.
Your belongings: replacement cost or actual cash value
Personal property coverage pays one of two ways:
- Replacement cost pays what it costs to buy a new equivalent item.
- Actual cash value pays the item's depreciated value — what a five-year-old couch is worth today, not what a new one costs.
Replacement cost coverage costs a little more, but it makes a large difference after a big loss.
Review your limits regularly
Renovations, additions, a new kitchen or a finished basement all raise your rebuild cost. Review your dwelling limit whenever you improve your home, and compare quotes at renewal to make sure you are paying a fair price for the right amount of coverage.
This guide is general information, not legal, tax or financial advice. Coverage options, discounts and eligibility vary by carrier and by state.
