What Is the Difference Between Replacement Cost and Market Value?

Moving into a new home you purchased or rented is exciting, but with that excitement comes decisions on homeowners and renters insurance. One crucial decision when signing up for that insurance policy is whether you will select replacement cost of lost or damaged items or market value. In the case of homeowners insurance, this can apply to the structure as well. While some may think that replacement cost and market value are similar, these two terms are actually very different and can result in different obligations for you should the worst happen.

Replacement cost: this term refers to the cost of replacing the item itself. For example, if your home is destroyed by a hurricane and is uninhabitable, your policy will replace the structure and contents of the home subject to policy limits. Although this provides the maximum benefit to the policyholder, it may not be right for everyone, given the probability that the payments on the policy will be higher.

Market value: this term refers to what the value on the open market would be to replace the home and/or its contents. For example, if you bought your home for $300,000, but market conditions have deteriorated and it is worth only $250,000, your policy would only cover the lesser current value subject to policy limits. That means you would have to either make up the difference yourself or build a less expensive home.

No matter what policy questions you have, we are here to help. Call or email us today, and we can guide you through the best options for you.