Updated: Oct 11, 2019
During our consultation with clients, we often get this question or thought process. There is a big difference between what your home is worth (market value) and reconstruction cost (what it cost to actually rebuild). Lets further breakdown these 2 factors to get a better understanding of how coverage for your home works.
Reconstruction Cost - All carriers will use some form of reconstruction cost estimator to help determine proper coverage for your home. These estimators will take information on how your home is constructed to help come up with that figure for coverage. Usually total square footage, exterior wall construction materials, number of bathrooms, foundation type, and etc., will be used in determining this number. Of course, this number will vary between insurance providers due to each company's methodology. Keep in mind that no company can be exact in this number because of variance of labor and material costs at the time of loss. However most major company policies will and should include extended replacement cost coverage, which is additional coverage to help cover those unexpected material, labor, and inflation costs.
Market Value - Market value is a home's value based on what homes are selling for in that particular area. Insurance providers cannot take into account market value as this can drastically change base on the housing market. When you go to sell your home, price/cost can be affected by a number of economical factors that have no direct correlation to what the home cost to rebuild. Also market value can factor in land value whereas an insurance company does not look at or even insure the land your home is built on. For example a home with a lake front view may be more desirable and more expensive than a home without this benefit.
By having a solid understanding of the difference between these 2 cost factors, it will help you have a better conversation with your agent when determining the proper coverage amount.