Insuring Your Home: Actual Cash Value Vs. Replacement Cost

What value should I insure my house for?

The value you insure your house for should be based on the cost of rebuilding your home from scratch, rather than the price you paid for it or its current market value. This is because the price of land and the cost of rebuilding are different. It can be tricky to accurately estimate how much it would cost to completely rebuild your home, unless you are a builder. Building costs fluctuate from year to year and are affected by construction demand, as well as building materials and labour costs.

To calculate the cost of rebuilding your home, you can use a building replacement calculator, which will take into account factors such as the size of your home and the quality of the fixtures and fittings. You can also get a professional rebuild valuation from a surveyor, builder or architect. This will be different from a valuation from an estate agent, who would give you the sale price of your home.

It's important to review your home insurance coverage regularly to make sure it keeps pace with inflation and increases in construction costs. You should also increase your coverage if you remodel your home, as this usually increases its value.

Building insurance

When calculating the cost of rebuilding your home, it is important to consider various factors that can impact the cost. These include:

• Local construction costs: The cost of rebuilding your home will depend on the local construction costs in your area, including the cost of materials and labour.
• Square footage of the structure: The larger the home, the higher the rebuilding costs will be.
• Type of exterior wall construction: The cost of rebuilding a home with frame, masonry, or veneer exterior walls will vary.
• Style of the house: The style of your house, such as ranch or colonial, can impact the rebuilding costs.
• Number of bathrooms and other rooms: The more rooms your home has, the higher the rebuilding costs will be.
• Type of roof and materials used: The cost of rebuilding a roof can vary depending on the type of roof and materials used.
• Other structures on the premises: Garages, sheds, and other structures on the property will need to be included in the rebuilding costs.
• Special features: Fireplaces, exterior trim, arched windows, and other special features can increase rebuilding costs.
• Custom-built homes: If your home or part of it was custom-built, the rebuilding costs may be higher.
• Improvements and renovations: Any improvements or renovations you've made to your home, such as adding a second bathroom or renovating the kitchen, can increase the rebuilding costs.

To avoid underinsurance, it is recommended to use a combination of calculator-based costs and your own estimates. There are two common methods for estimating the cost of rebuilding a home:

• Cost-per-square-metre: This method estimates the cost of rebuilding based on the size of your home. However, it may not be accurate and could lead to underinsurance.
• Elemental estimating: This method is more detailed and considers various factors involved in repairing or replacing your home. It takes into account the construction period, quality, and materials used, as well as additional features like bathrooms, garages, and balconies.

You can use a home building replacement calculator or get a professional rebuild valuation from a surveyor, builder, or architect to estimate the rebuilding costs more accurately. It is also important to regularly review and update your policy to ensure that it reflects any changes or improvements made to your home.

Contents insurance

When taking out contents insurance, your insurance provider will want to know how much your possessions are worth. It is important to take the time to work out the total value of your possessions accurately. The estimated value you give is the maximum amount your insurance provider would pay out if all your possessions were destroyed. If the estimate is too high, you could end up paying more than necessary for your insurance. If it is too low, you could end up underinsured, meaning your insurance provider might only give you a percentage of any claim you make.

To calculate the value of your contents, you should go from room to room, making a list of all your possessions and estimating how much each possession is worth. You can use a contents calculator to help you work out the total value of your possessions. It is important to include as many details as possible, such as serial numbers, receipts, warranties, photos, condition, and the date of purchase.

Consider what type of cover you want for your possessions. Most contents insurance offers the replacement value of your belongings, sometimes called "new for old" cover. This covers the full cost of replacing your belongings with new ones, which is often more expensive than the value of the items at the time they are insured. Some policies offer the value of your lost or damaged belongings at the time they are insured, which may depreciate over time.

When choosing contents insurance, think about the value of your belongings and what you could afford to replace or lose if something went wrong. You should also consider what your belongings need to be insured against. For example, while accidental damage from everyday life or theft may only affect a few items, fire or flood could destroy all your belongings.

Remember to regularly update your contents insurance policy to reflect any changes, such as adding new items or special items.

Inflation and rising costs

Inflation is also affecting the price of building materials. Construction material costs reached a 40-year high in November 2021, and labour costs are also rising. This is due to a number of factors, including Brexit, Covid, supply chain disruption, and the war in Ukraine.

The impact of inflation on insurance costs is twofold. Firstly, the cost of rebuilding a home after a disaster will be higher, and secondly, insurance companies are increasing their premiums to cover their own rising costs.

To protect against rising costs, it is important to review your insurance policy regularly. This will ensure that your coverage keeps pace with inflation and increases in construction costs. You can also add an inflation guard clause to your policy, which automatically adjusts the dwelling limit to reflect current construction costs in your area when you renew your insurance.

Another way to protect against rising costs is to choose an insurance policy that is subject to index linking. This means that the sums insured are automatically increased by insurers at renewal to reflect inflationary factors that may impact the cost of rebuilding a property. While index linking rates have been relatively low in the past, they are now increasing to rates of 10% or more.

Additional structures

When it comes to insuring your house, it's important to understand that the price you paid for it is not the same as the cost to rebuild it. Building costs fluctuate over time and are influenced by factors such as construction demand, labour costs, and the cost of building materials. Therefore, when determining the value of your insurance, it's crucial to focus on rebuilding costs rather than the original price of your house.

Now, let's delve into the topic of "additional structures" and how they fit into the overall insurance equation. Additional structures, also known as "other structures," refer to physical property that is not directly attached to your home but is located on your premises. This can include:

• Detached garages
• Sheds
• Fences
• Guest houses or in-law suites
• Detached patios or decks
• Mailboxes
• Light posts
• Driveways
• Swimming pools

Insurance companies define structures broadly and may include anything not physically connected to the main dwelling. The coverage for these additional structures is typically set at 10% of the dwelling coverage limit in a standard home insurance policy. However, if you have high-value detached structures, you may need to increase this coverage percentage to ensure adequate protection.

When calculating the value of your insurance, consider the rebuilding costs of these additional structures. The cost of rebuilding a structure can differ significantly from its actual cash value due to factors such as depreciation and wear and tear. Therefore, it is advisable to opt for replacement cost value coverage, which will pay for rebuilding the structure regardless of its current market value.

It's also important to note that other structures coverage only applies to the structure itself and not the contents within. If you have valuable items stored in these additional structures, you may need to consider additional coverage, especially if you're running a business and storing equipment or inventory.

To ensure you have the right level of coverage, keep your insurance agent or broker informed about any changes or additions to your property, including fences, sheds, or patios. By providing accurate and detailed information, you can make sure your insurance policy adequately protects all the structures on your premises.

Personal property

When you file a claim for personal property loss, the insurance company will pay to repair or replace your affected items in one of two ways: actual cash value (ACV) or replacement cost value (RCV). ACV reimburses the cost of your personal property, less depreciation and normal wear and tear. RCV, on the other hand, covers your personal property based on its current market value, with no depreciation calculation. Most standard homeowners policies use ACV as the default option, while RCV policies may be more expensive.

To determine how much personal property insurance to purchase, you should take an inventory of your belongings and estimate the cost to replace them. You can use a home inventory app or consult a qualified building consultant or architect. You should also consider the location of your home and the likelihood of certain disasters, such as floods or earthquakes, and purchase additional coverage if needed.

Frequently asked questions