For most of us, our home is the biggest investment we will ever make. We want to keep our investment protected – and have California home insurance in place to do so – but how much coverage on our home do we actually need? In today’s real estate market of declining home prices, some customers inquire about decreasing the amount of coverage on their policy to be in line with the market value of their home. It’s important to understand the term “replacement cost” – because that, rather than market value, is what insurance companies use to determine the amount of coverage you need.
The term “replacement cost” is defined or explained in your policy. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. Refer to your policy for the exact definition and explanation of replacement cost.
For insurance purposes, your home should be insured to 100% of its replacement cost. This will ensure the ability to rebuild the entire house, the way it is now, in the event of a total loss. One thing to remember, insurance companies do not insure the land your property is on so the replacement cost does not take into account the value of the land.
Replacement cost IS NOT:
1. Today’s market value of the home.
2. The home’s purchase price or the cost of the land.
3. The outstanding amount of any mortgage loan.
Talk to your Tower Insurance agent if you have questions about the replacement cost on your homeowners insurance.