Market value versus replacement cost

5 minute read Published on Jul 13, 2021 | Last updated Jul 13, 2021 by BrokerLink Communications

Market value versus replacement cost

Sometimes, insurance terms can be a little confusing. But don’t worry — we’re here to help. For example, if you have home insurance, you’ve probably heard the terms market value and replacement cost. While they might sound similar, market value and replacement cost of a building are have different values which are estimated using separate criteria so the figures are generally different.

We’ll break down the differences between market value and replacement cost of a building; explain why this difference is important and how it might affect your insurance.

What is replacement cost?

First, let’s cover the definition of replacement cost, and how it affects your insurance.

  • Replacement cost is the amount it would cost the insurance company to rebuild or replace the building from the ground up, in the event of a total loss.
  • It’s important to remember that this dollar value is the cost to rebuild your home exactly as it is today. Replacement cost does not include the value of the land, location, or nearby amenities. Replacement cost also doesn’t consider the value change caused by the supply and demand of housing.
  • Replacement cost includes all the details of the building, including the type of foundation, type of windows, number of windows, light fixtures, size of the home, bedrooms, exterior finishes, shingles, interior finishes, flooring, countertops, and much more! See below for a more complete list. All of these details are factored into your home insurance.
  • In addition to all of these building details, the replacement cost of the building considers the price of these materials, the cost of labour for building and installing, and the cost of inflation. This means that replacement varies by location.

What is market value?

Let’s talk a little bit about market value. Market value is the price at which a building can be bought or sold:

  • Market value considers all the details of replacement cost, but also includes many other factors.
  • Unlike replacement cost, market value is highly dependent on the building’s geographic location. The proximity to schools, libraries, parks, grocery stores, and more, affect market value. The type of neighbourhood is also important for determining the market value.
  • Also unlike replacement cost, market value is extremely dependent on supply and demand in the market. This often accounts for a substantial portion of the difference between market value and replacement cost.
  • Market value fluctuations are influenced by a wide degree of factors, such as: trends - style of the building; curb appeal; privacy options, and the floor plan. For example, open-concept homes are currently popular, which may increase their market value.

Replacement cost vs. market value

Most often, your insurance company will be interested in the replacement cost, because a higher replacement cost usually causes a higher insurance premium. The market value of your home is the price at which your home could be bought or sold in the real estate market. Since the market value includes the value of land, location, and more, the market value is usually much greater than the replacement cost.

Different types of insurance coverage take into account replacement cost in unique ways. This table covers some of the most common types of home insurance.

Types of insurance coverage

Guaranteed replacement cost

This means your home is guaranteed to be covered for the full cost of replacement, even if it exceeds the replacement cost limit in your policy. Since this type of insurance requires certain conditions to be met, it’s important to ensure your insurance is up to date.

Actual cash value

Actual cash value, or ACV, is the replacement cost minus depreciation. ACV is lower because it considers the age of the home and the age of its contents. Just like your car, your home and its contents may lose value over time.

Specified limits

This means that the insurer will reimburse you for the cost of repairing or rebuilding your home, only up to the coverage amount written in your policy.

Pro tip:

When determining your home’s market value, it’s best to talk to a professional.

If you want to know more about market value, replacement cost, actual cash value, or other terms used in insurance policies, contact your local BrokerLink branch!

Factors that affect your home’s replacement cost

There are many factors that affect your home’s replacement cost, including:

  • Size or square footage.
  • Number of floors.
  • Custom features or high-end finishes.
  • Interior finishes.
  • Type of garage and basement.
  • Age: older homes may have features that are harder to replace.
  • Exterior home features, like siding, windows, and roof type.
  • Fixtures, cabinets, flooring, and appliances.
  • Renovations: A renovation can change the home’s replacement value so you should notify your insurance company if you renovate.
  • Furniture and other valuables. Keep a home inventory of all the important and valuable items, as this can help ensure an easier claims process.

Still have questions about market value or replacement cost?

Contact BrokerLink to talk to a home insurance expert. We’re happy to help and answer all of your insurance questions!

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FAQs for market value and replacement cost

Does the replacement cost amount affect my insurance premium?

Yes. Replacement cost affects the insurance premium. If the replacement cost increases, your insurance premium will increase. If the replacement cost decreases, your insurance premium will decrease.

How would I know if my home’s replacement value is accurate?

Estimating replacement cost can be a difficult task, but there are special online calculators or you may contact a professional appraisal service. It’s important to make sure you have sufficient coverage, so contact your insurance broker to discuss the details.

Is a replacement cost policy the best option for an old home?

Maybe. There are many different types of insurance, and your situation is unique. Contact your insurance broker to determine which type of insurance is best for your home.