One of the integral components in calculating an insurance premium is knowing the replacement cost value of a home. Homeowners must realize that the replacement cost and the market value are not the same.
While the market value of a home may plummet or rise depending on a variety of factors, the cost to rebuild a home changes only as the cost and availability of materials change. A 33% drop in the market value of a home does not affect the availability or cost of building materials to replace the home in the event it suffered an insured loss. Therefore, homeowners must properly calculate and insure their home to the replacement cost value, not the market value.
There are several tools available on the internet to help homeowners get a better handle on the true replacement value of their homes.
Free Replacement Cost Calculators
Home Insurance Website: For a quick, down and dirty calculation of a home’s replacement cost, consumers can visit the website. Armed with the home’s zip code and square footage, the website calculates the cost to rebuild on a per square foot basis in the zip code location of the home. Keep in mind that it is an estimated replacement cost based on recent construction in the area.
Building-Cost.net: This website takes a different, more detailed approach in determining the replacement value of a home. Building-Cost has a detailed online questionnaire in which the consumer provides information about the home. In order to get an accurate result using this replacement cost calculator, it is recommended that the homeowner take time to answer each question providing as much detail as possible. Building-Cost then compares the building criteria against the latest construction and labor costs in the home’s area. The resulting replacement cost calculation is broken down by material costs, labor and equipment. While this type of calculator may provide more information than necessary for insurance purposes, it’s good to have in order to compare it against other replacement cost calculations.
Replacement Cost Calculators for a Fee
Xactware Website: For $8.95, homeowners can register at the Xactware website. Once registered, the homeowner can use the Xactware valuation tool which guides the user through several questions to determine the replacement cost of the home. Their database uses the same information that insurance companies use to determine and replacement cost.
Insure to Value website: It offers three types of reports. Homeowners can select the free complimentary report which comes along with a free homeowner’s insurance quote. If the free report is not specific enough, there’s the second option which provides location specific cost information based on zip code. The third and most comprehensive report costs $19.95 and provides information based not only on location, but specific characteristics of the home to be insured.
Free vs. Fee Replacement Cost Reports
If the free replacement cost calculators are not sufficient to give a proper valuation, it’s worth spending the extra $10 or $20 for a full report. When it comes to getting the best price on a homeowner’s insurance policy, the nominal investment to properly determine the replacement cost is worth it.
Landlord Insurance Policies Do Not Cover Tenants
Whether a tenant is renting a small one-bedroom apartment or a full multi-story home, it is important to think about how much is at stake if there were an event, such as fire, that caused a total loss. The owner of the building or landlord would be fully reimbursed because she has a homeowners or landlords insurance policy protecting her interests. The owner’s policy covers the owner’s interest only, not the tenant’s.
Unless a tenant has nothing to lose in the event of a total loss, purchasing a renter’s insurance policy is highly recommended. Tenant insurance policies not only cover the loss of personal property, but it also protects the tenant from liability claims that arise as a result of an occurrence on the property itself such as a trip and fall.
Things to Consider When Shopping for Renters Insurance
As with the traditional homeowner’s insurance policy, renters have options when it comes to purchasing coverage. The two most important options to consider are the perils insured and the valuation clause.
Insurance Policy Perils Insured
Insurance policies can be written on a named peril or all risk basis. Named peril policies are less expensive because the insurance company will only pay if a loss occurs as a result of a peril named on the policy. The basic named perils include, fire, lightening, windstorm/hail, explosion, riot (or civil commotion), aircraft, vehicles, smoke, V&MM (vandalism and malicious mischief), theft and volcanic eruption. Although the perils sound all encompassing, it’s more limiting than all risk coverage.
All risk coverage means the insurance company will respond if a loss is caused by any peril except for those excluded in the policy form. Therefore, damage caused because little Tommy clogged the kitchen sink causing the water to overflow into the living room causing irreparable damage to the 5 year old couch, loveseat and ottoman set would be covered under an all risk policy (Tommy flooding an apartment is not a named peril and would be excluded under a named peril policy).
Renter’s Insurance Valuation Clause
Another aspect to consider when purchasing a renters insurance policy is the valuation clause. The valuation clause is how the insurance company determines how much to pay for property damage. The two methods most commonly used are replacement cost and actual cash value.
Let’s take the 5 year old damaged living room set for example. If the policy were written on a replacement cost valuation, the insurance company would pay the amount it costs to replace the three piece set with one of “like kind and quality.” However, with a policy written on an actual cash value basis, the insurance company would have to take the age of the living room set into consideration, deduct depreciation and issue a check for the depreciated value.
While the premium charged for an all risk, replacement cost policy is higher than that for a named peril, actual cash value policy, it is up to the tenant to decide if the additional premium is worth it.
Premium Savings – Multi-Line Discount
Renters with automobile insurance would receive a multi-line premium discount by placing the tenant insurance policy with the same carrier that writes the auto policy. However, if that’s not an option, it’s best to obtain at least three quotes before selecting an insurance company.