Replacement Cost vs. Market Value
When you purchase a home insurance policy, your insurer will either insure your home for its replacement value or its market value. Replacement value represents the amount of money it would take for you to rebuild your home according to today's building prices, assuming you build it in the same spot. Market value, on the other hand, is the amount of money your home would likely sell for to a willing buyer prior to an accident or disaster that causes a claim.
The two values can vary greatly - particularly during extreme economical circumstances. For example, a home's replacement value may be less than its market value when home sales are high and the home is located in a desirable neighborhood. On the other hand, the replacement value may be much higher than the market value during economic downturns that cause home sales to slow and prices to drop.
To be safe, most insurance experts recommend that you purchase a policy that will cover at least 100 percent of your replacement value, assuring that you can return to your usual way of life in case something happens to your home. Once you have a policy, review it regularly, as the price to rebuild your home may change over time due to changes in labor prices and material expenses.
