The valuation of your home influences your homeowners insurance policy, but how is that value determined? There are several ways to determine your home’s insured property value, including replacement cost, fair market value, assessed value, and actual cash value.
Navigating these different measurements of value can leave you wondering which property valuation method is the right one for your home. Here’s how to understand the value of your home.
Why Your Homeowners Insurance Property Value Matters
The different ways to estimate a property’s value usually result in different figures. When it comes to home insurance, there are two main reasons why getting the correct value for your property is so important.
1. It affects your premiums:
Your premiums will increase with a higher valuation, so it is essential to make sure you have the most accurate valuation possible.
2. It’s the settlement amount:
The valuation on your home insurance policy is the figure that your insurer commits to pay you if you lose your home in a covered event like a fire. If you undervalue your property, you’ll get inadequate insurance coverage. As such, the settlement amount wouldn’t be enough to rebuild or replace your home if you lost it in a covered disaster.
How Insurers Calculate Homeowners Insurance Property Value
Most insurers will either use replacement cost or actual cash value to determine your home insurance valuation.
1. Replacement Cost
This figure is the amount it would cost to rebuild your lost property from the ground up and replace any damaged belongings. When using this form of coverage, insurers don’t take depreciation into account when calculating your property’s replacement value. Factors such as wear and tear or the age of your home do not come into play.
Homeowners insurance does not automatically increase when you make improvements to your home. Have you renovated your house since the last policy review? If yes, your insurer needs to know about it because any modifications on your property will impact its replacement cost. Failure to update your policy with any such changes may leave your home underinsured.
Be sure the total estimate covers things like the size of your house, including square footage, personalized features, and any detached structures like the basement, garage, or shade. Your entire home inventory should be part of the replacement value too. This includes furniture, equipment, valuables like art collections, and other personal properties.
2. Actual Cash Value
With this type of valuation, the insurer isn’t concerned about the cost of restoring any damaged property to its brand-new status 20 years ago. Their interest is the amount it would take to replace your property in its current, depreciated state. In this case, the loss of value in any part of the building, including roofing, impacts the settlement amount you may receive from your insurer from a covered event.
Since actual cash value takes your property’s depreciation into account, it’s usually cheaper than replacement cost. When working it out, you’ll want to consider your property’s age and its expected lifespan to determine if this option is the right one for you.
3. Fair Market Value
This method uses the real estate market rate as the basis for your property’s home insurance valuation. It estimates the amount you’d get if you sold your property on the open market. This estimate includes the value of land and is usually higher than the property’s replacement or actual cost. An important thing to remember with this valuation method is that the fair market value changes in tandem with real estate dynamics. It may go up or down depending on local changes, such as infrastructure upgrades, enhanced security, or new schools.
Each method of valuation has pros and cons, so it is important to understand what makes sense for your home. Are you looking for affordable homeowners insurance in Lancaster, CA? If so, then contact the experts at John E. Peakes Insurance Agency. We are ready to assist you with all your home coverage needs today.