Difference Between Replacement Cost & Market Value

Difference Between Replacement Cost & Market Value

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Replacement cost and market value are terms that are often repeated, but what do they mean?

When you purchase a home and a homeowner insurance policy, you’ll have to make quite a few decisions about your coverage. Understanding the difference between replacement cost and market value will help you make the choice that is best for you and your family’s financial future.

Replacement Cost

  • Replacement cost is a property insurance term that refers to one method for establishing value of insured property for the purposes of determining the amount an insurance carrier will pay in the event of a loss.
  • It is defined in the insurance policy as the cost to replace the damaged property with materials of like, kind and quality, without any deduction for depreciation.
  • Extended or Guaranteed Replacement Cost are types of property coverage that offer a higher level of protection.
  • Guaranteed Replacement Cost will pay the full cost to repair or replace your damaged or destroyed home as it was before the covered disaster, regardless of the dwelling limit shown on your policy. A Guaranteed Replacement Cost policy protects you from sudden increases in construction costs due to a shortage of building materials after a massive disaster or other unexpected situations.
  • Extended Replacement Cost provides additional coverage above the dwelling limit shown on your policy up to a specified percentage to repair or replace your damaged or destroyed home as it was before the covered disaster.
  • Your insurance agent can be helpful with determining the replacement cost of your home by referring to various industry resources, such as the Marshall & Swift Guide.

Market Value

  • Market value is the amount that a buyer would pay to purchase your home and its land in its current condition.
  • Unlike the replacement value, the market value is influenced by factors beyond the material and labor costs of repairs or reconstruction, such as proximity to a good school, local crime rates, and availability of similar homes. The market value can fluctuate due to many economic factors, as we have seen the recent past.

Contact your insurance agent to discuss coverages.   Your team at Hoffman Brown Company in Sherman Oaks, California is happy to help you.