One of the many side effects of the COVID-19 pandemic has been the astronomical increase in the cost of building supplies. Across the board, the cost of concrete, plumbing, and electrical materials has climbed dramatically. However, no building material has seen the huge increase in cost that lumber has.
According to Business Insider, the cost of lumber has risen 340% in just over a year, adding nearly $36,000 to the cost of building a new home.
This major cost change is an excellent example of why replacement cost matters. The amount of insurance on your home will always be different than the amount you purchase your home for, because in most cases your home’s real value is greater than it’s market value. This is because market value deals only with the buying and selling process, not rebuilding. Building is more expensive than buying, and rebuilding costs are much more than it costs to build a home from scratch. The amount of insurance on a house covers your home for the amount it would cost to rebuild your home from the ground up after a total loss.
How do we determine the amount of insurance on a house? As agents, we review photos and information on each individual home we insure. Additionally, we use Marshall & Swift, which provides a complete and defendable determination of value, based on three cost methodologies: square foot, segregated (component-by-component costs of frame, plumbing, etc.), and unit-in-place costs (individual pricing of components such as windows, roofs, etc.) As you can see, care is given into each homeowners proposal we provide. Careful evaluation of your specific home allows us to create tailor made policies and accurate protection on your home. This evaluation is one of the many benefits of using a broker who will rely on their own knowledge, rather than a generated amount from a specific insurance company.
Now more than ever, the amount of insurance on your home should be reviewed and adjusted accordingly to reflect the increased cost of supplies. Simply put, should you have to completely rebuild your home after a total loss situation, it will cost significantly more now than it would have a year ago.
There are three options when it comes to calculating the amount of protection your homeowners insurance will provide, and understanding each option will help you decide the right balance of protection and cost in your insurance.
- Actual Cash Value (ACV)
- Replacement Cost Value (RCV)
- Guaranteed or Extended Replacement Cost
Actual cash value is based on the market value or initial cost of your home and personal property with depreciation considered. Depreciation is generally factored by accounting for the expected lifetime of an item, subtracting a percentage of value for each year since its purchase. This means the insurance coverage will typically decrease over the number of years.
Replacement cost value is the amount of money that it would take to replace your damaged or destroyed home with the exact same or similar home in today’s market. With replacement cost, depreciation is not factored. When it comes to replacing your home, the replacement cost option is vital to get homeowners closest to your living situation before a covered peril occurred.
Guaranteed or extended replacement cost policies offer the most extensive protection, as this coverage is essentially an expanded version of replacement cost value. This option pays the cost to rebuild your home exactly as it was before a peril – even if the cost exceeds the estimated value of the home.
This is important now because unlike regular RCV coverage, extended replacement cost coverage protects you against sudden increases in materials or construction costs. Rather than a guaranteed replacement cost policy, some insurance companies offer an extended replacement policy. Most companies offer an additional 25% or 50% of the replacement value of the home.
With the severe increase to building materials and lumber, we implore you to speak with your agent about reevaluating the amount of insurance on your home. Additionally, this may be the right time to add extended replacement cost coverage to the policy as well. Extended replacement cost and guaranteed replacement cost policies provide peace of mind, so you can feel confident in the protection knowing you will be covered should the worst case scenario occur.
Beginning my insurance journey on the claims side of the industry gave me valuable insight on the importance of replacement cost, particularly extended/guaranteed replacement cost. This is also an opportunity to review and updates you may have made to your home during COVID.
I welcome the opportunity to provide a personalized insurance review and proposal to protect you and your family. Please email me at kate@fdinsurancegroup.com or call 724-575-7237 and I’ll guide you to proper protection.