A common mistake when homeowners are researching insurance quotes is that they often use the purchase price of their home to determine the dwelling value. The purchase price of your home (or market value) includes the land on which the home resides, as well as market inflation. For that reason, your dwelling coverage should always reflect the replacement cost (cost to rebuild) rather than the market value or purchase price.
Assume two identical houses are built – one in the thriving suburbs and the other in a depressed neighborhood. The amount of property protection for the dwelling should be the same, as the cost to build the two houses was also the same. Your insurance company is not insuring the lot on which your house resides, but rather the structure of your home.
Insurance agents use a replacement cost calculator to generate the correct replacement cost. When consulting with your agent explain your home in extensive detail regarding the year the home was built, the square footage of the home, the number of bedrooms and bathrooms, details regarding the kitchen, if there is a fireplace, etc.
Most replacement cost policies require a certain percentage (typically 80%) of the replacement value to be carried at all times. If you carry less than the required percentage, you may be responsible for a percentage of a partial loss. It is recommended you insure your home for 100% of its replacement cost, which will ensure the ability to rebuild the entire house in the event of a total loss.