When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don't have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.
There are three ways to insure the structure of your home:
- Replacement Cost: Insurance that pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.
- Guaranteed Replacement Cost: Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120 percent of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.
- Actual Cash Value: Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowner's policy specifies that property is covered for its replacement value, the coverage is for actual cash value.
For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house. To find out the building rates in your area, consult your local builders association or real estate appraiser.
Factors that will determine the cost to rebuild your home:
- Local construction costs
- The square footage of the structure
- The type of exterior wall construction: frame, masonry (brick or stone) or veneer
- The style of the house (ranch, colonial)
- The number of bathrooms and other rooms
- The type of roof
- Attached garages, fireplaces, exterior trim and other special features like arched windows.
Also be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an "Inflation Guard Clause" to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area. Also, be sure to increase the limit of your policy if you make improvements or additions to your house.