Does Your Home's Replacement Value Affect Your Insurance?
Your home’s replacement value is one of the biggest factors affecting your home insurance premium. Does this mean your home insurance premium can go up when it’s renewed, even if you didn’t have a claim?
The answer is often yes. Why? The cost to repair and rebuild your home doesn’t stay the same over time. Factors such as inflation, building materials, labour, and possessions replacement impact the cost to rebuild or repair your home – and can fluctuate over time and even year-to-year. It’s expected to cost more to rebuild or repair your home today than it did five or 10 years ago.
Does the market value of my house affect my home insurance?
No. The market value of a home, its selling price, doesn’t affect the price of your home insurance premium. Again, the cost to rebuild and repair your home typically affects the cost of your home insurance.
Insurers use replacement value to set the home coverage limit on your property insurance. By doing this, you should receive a sufficient insurance settlement to rebuild or repair your home in case of damages caused by a covered claim, such as a fire.
Understanding the importance of replacement value
What you need to know: Even the most accurate estimate may not be enough to rebuild or repair your home, depending on the context of the event, such as a natural disaster, and the current economic climate including inflation.
Choose a home insurance policy that fits your needs. Replacement value is only an insurance provider’s best estimate because the value of your rebuilding or repairing your home could fluctuate over time.
Did you know? The value of your home to an insurance provider isn’t the price for which it sells. It’s the cost to repair or rebuild your home to the same standard if it’s damaged or destroyed.
Replacement value of your home
The replacement value of your home is determined by these factors:
- Size: square footage. The larger a home is, the more costly it will be to replace.
- Home features: Number of floors, kitchens, bathrooms, garage, pool. Does your home have a basement or is it on a concrete slab?
- Renovations and additions: Increase your home’s replacement value
- Location: Rural homes may be more difficult to rebuild than homes in major cities due to access to labour and materials.
- Age of your home
How to decide between a replacement cost and actual cash value home insurance policy
It’s usually recommended that homeowners get a replacement cost policy for their home insurance. You may save money on premiums with an actual cash value policy, but you will likely have to pay a lot of extra money to replace your belongings should something happen to your home, such as a fire.
If you had a house fire, an actual cash value policy would not cover the full replacement cost of rebuilding your home.
What affects the replacement value of your house
The price of labour and materials fluctuate and this can affect the replacement value of your house yearly. Inflation can also impact the cost to rebuild or repair your home.
What if I have a low replacement value for my house?
A lower replacement value will reduce your home insurance premium, but if this amount is too low you may not have enough coverage to replace or rebuild your home. That’s a risk.
Insuring a high-value property
A high-value property in Toronto may look different than a high-value property in Winnipeg. When you get insurance for a high-value property, you need to understand how insurance companies view the value of your property.
A high-value residential property typically requires specialty insurance that specifically addresses a rebuild with high-quality construction materials and potentially using specialized trades.
Construction costs for a full rebuild of a high-value property start with demolition and end with the finishing details. Labour, disposal of construction debris, materials, and inspections are all factored into the cost of rebuilding a high-value property.
Final thoughts
When it comes to insuring your home, you’ll need to decide whether you’d rather spend a bit more money on premiums to make sure you have enough replacement coverage.
