Getting What You Are Paying For

Brenda “Bren” Sheriff, CSA
Brenda “Bren” Sheriff, CSA

Getting What You Are Paying For


Homeowners insurance isn’t a luxury; it’s financial armor. But too often, homeowners don’t fully grasp the difference between the two types of coverage for homeowner policies: replacement cost and market value policies. I hope my article today helps you to understand if you are getting what you are paying for.

What type of policy covers your home?

Replacement Cost Coverage: Pay Now, Save Later

A replacement cost policy covers the full expense of repairing or rebuilding your home with materials of similar kind and quality, regardless of depreciation. For instance, if a fire destroys a 20-year-old roof, the insurer pays to put a new roof on your house—not just the depreciated value of the old one.

Pros:

Better protection against inflation and rising construction costs. If labor and building supply prices increase, you are still covered.

Peace of mind. You won’t face a funding gap when rebuilding after a disaster.

Asset preservation. Your home’s functional value is restored, not just its resale value.

Cons:

Higher premiums. Because the insurer is on the hook for more, you’ll pay more each month.- Possible over-insurance in declining markets. If your home’s market value falls far below replacement cost, you may be paying to insure more than you could ever recover in resale.  This is a major concern for older homes in communities with low resale values.

For homeowners who plan to stay long-term, replacement coverage often makes the most sense. It ensures your property remains whole, even if it is totally destroyed.

Market Value Coverage: Lower Cost, Higher Risk

A market value policy pays what your home is worth on the open market, factoring in age, depreciation, and local real estate conditions. If your house burns down, you’ll receive a payout based on what the home was worth before the loss—not what it costs to rebuild.

Pros:

Lower premiums. Market value coverage is generally cheaper, appealing for budget-conscious-households.

Aligned with resale reality. If your primary concern is recovering the equity you’ve built, this may suffice.

Cons:

Risk of being underinsured. In many cases, the cost to rebuild exceeds market value, leaving a serious shortfall.

Not inflation-proof. If construction costs rise faster than your home’s values, the gap widens.

Potential for financial stress. After a loss, you may not have enough to rebuild your home to its former standard without dipping into savings, taking on debt, or worst yet, the insurance money will only pay off the debt to your lender and you and your family walk away with nothing.

Market value policies tend to work best for owners of older properties where the rebuilding cost far exceeds what the market would pay for the home, or for those who would not rebuild in the event of total loss.

Bottom Line

The choice comes down to priorities. If you want the security of knowing your home can be rebuilt no matter what, replacement cost is the safer bet—though your premiums will be higher. If your budget is tight, and you accept walking away from your home rather than rebuilding, then market value coverage can work for you.  Just know that too often it is the lender and not you that really benefits from this type of insurance when you have a mortgage.  However, if your home is paid for and you do not think that you would want to rebuild it, if your home became a total loss, then this is the best choice for you.

Think of it as insurance math: pay more now for certainty of rebuilding your home or save now, but risk not getting what you are paying for later, if you suffer a loss. The smart move?  Revisit your policy annually, run the numbers on rebuilding costs, and align your choice with both your financial plan and your long-term intentions for your home.  Not sure?  Call me for a review of your homeowner policy.


Due to the length of this week’s article, the “Weekly Quiz” will return next week.

Brenda Sheriff, CSA

773-817-0601

basheriff1@gmail.com

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