What is replacement value?

When you purchased your home and took out a mortgage, you most likely were required to purchase property and casualty insurance for your home as well. The cost of replacing your home over the past years since you signed on the dotted line has risen significantly, but your coverage may not have kept pace. If there is a fire in your home, you will need to replace, rebuild or knock your home down and start all over again. Building materials such as concrete, wood and steel have risen in price due to demand, inflation and tougher building codes. Wood used in construction has risen over 20% since 2003. If your home is significantly damaged, your coverage may not do the job in restoring your home to its original glory and comfort.

Look for a rider to your policy that increases coverage yearly or check out property values in your neighborhood and make sure that your policy is adjusted accordingly. However, keep in mind that the land you live on has value in and of itself apart from the value of your home. Do not pay for coverage that includes the value of the land that most likely will remain intact during a disaster.

Check with your insurance policy or insurer to see how much they cover per square foot for rebuilding. Now the price is up to at least $150 (an increase of 70 to 80% over the past five years) per square foot, and that does not take into account high end living or homes built at the seashore or on severe inclines. Call a local contractor to get a figure for your area, and get an estimate and compare it with your insurer's figures.

Some insurance policies will guarantee replacement coverage. Make sure you know whether yours is guaranteed or if there is some limit in your policy as to how much the insurer will pay. Then adjust accordingly.