Something we hear all the time when insuring homeowners is, “Why do we need so much coverage? We only paid X for our house.” Our answer always centers around replacement cost vs. market value.
Your policy needs to cover the replacement of your home, not what you paid for it. Here is an example using US housing data:
Average value of a home in the US is $279,000 and the average size is 2,426 square feet. This is the likely price you would pay on the open market. Now let’s look at what it would cost to replace your home if it burned down.
The average cost to build a home is at least $150 per square foot and given the same square footage of 2,426 in our example, that gives us a replacement cost of $363,900 or nearly $85,000 more than the market value.
In addition to the replacement value of your home, you need to consider the replacement value of all of your belongings. Consider how much it would cost to you to replace every single stitch of clothing, every plate, every appliance, every piece of furniture; the values rise quickly.