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Have you ever compared your property tax assessment and homeowners replacement cost and felt like you were paying too much?  During any down housing market the topic of “replacement cost” versus “market value” is almost a daily conversation for an insurance advisor.  Therefore, I would like to take this opportunity to explain replacement cost, actual cash value, and how both relate to market value.

Replacement cost is the cost to replace property on the same premises with other property of comparable material and quality used for the same purpose.  This means that the home you live in now, no matter how old it is, would be replaced top to bottom with 2012 construction and materials.  Replacement cost is a brand new home and despite the slumping housing market, the cost of construction continues to rise.  The calculation is figured using square footage, home style, exterior siding, number of bedrooms, bathrooms,

Actual cash value is an alternative to replacement cost and is essentially “replacement cost,” minus depreciation.  Actual cash value has also been called “fair market value” and is much closer to the market value figure you have in mind.  Keep in mind as you consider this type of policy, that this is not for those that wish to rebuild but would prefer to take some cash and move on.  Additionally, not all insurance companies will write these types of policies because as you can imagine, settling on an actual cash value can be difficult and is often times done so in a court of law.

A down housing market always makes swallowing the “replacement cost pill” that much more difficult, but consider during the booming housing market we had the exact opposite problem.  In 2005, when someone was trying to buy a home for $300,000 but the replacement cost was only $225,000 we ran into problems with mortgage lenders that required the home be insured for more.  It is important that we all understand that replacement is what it is, and goes both ways in good and bad housing markets.

If you have any questions concerning how your home is insured or how your replacement cost relates to market value, please let us know.


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