If you’re like many people, your home is your most significant asset.  When it comes to protecting it, you want to make sure your insurance provides the amount of coverage you need.

Yet how do you determine what the right amount is? For example, should the policy be based on your home’s market value or purchase price?  What about your home’s replacement cost?

Determining the answer to these questions is important.  A wrong answer could mean not having enough protection for your family’s home in the event of a total loss.

Is market value the correct choice?

In simple terms, market value is the price you would expect to pay to purchase your home on any given day.  As you know, market values can vary significantly.  For instance, in today’s economy, a home you paid $200,000. for five years ago could be worth only $150,000. Now, on the other hand, five years from now it could be worth $225,000. in an appreciating real estate market.

Of course, other factors affect a home’s market value, including the condition of the property, the home’s location, any improvements to the property, and local economic conditions.

Replacement cost is the correct choice.

In contrast, replacement cost is the total amount it would cost to rebuild your home at the same location, using like kind and quality of materials at today’s costs.  In order to be fully protected, you need to be insured at 100% of your home’s replacement cost.

In many cases, the home’s replacement cost exceeds the home’s market value.  Here’s why:

• Replacing a home often involves far more labor and materials than building a new home.
• Making repairs around an existing structure can increase the cost.
• Custom repair and altering construction to meet existing building codes is often more costly than new construction.
• The increasing cost of materials and labor has a significant effect on the replacement cost of your home.