Your home may be your largest investment. Your homeowner’s insurance policy is there to help you to protect that investment.
Unlike Auto Insurance, your home policy can have limits that are too high for you and your family. After all, if you insure a $200,000 home for $800,000 it does not mean that you will get $800,000 if your home is destroyed. This is where your Reconstruction Value or Dwelling Coverage comes into play.
Your insurance agent will help you review the features of your home and help generate either the Replacement Cost or Actual Cash Value of your home. With Replacement Cost coverage, people are sometimes very confused and frankly skeptical of the dollar amount that the home needs to be insured for. After all, you may have only paid that $200,000 for your home so why do you need to insure it for $340,000?
The reason for this variance is that the Replacement Cost is the amount that the insurance company believes it will cost to re-build your home in the event of a total loss (a fire, a tornado, etc.). One thing that I did not understand when I purchased my first home policies is that it actually costs more to build a home on an existing site than to start from scratch.
With an Actual Cash Value policy, your agent will help you determine the Retail Value of your home. Websites such as Zillow.com provide values for your home based on sales trends for your neighborhood and similar homes in your community. The Actual Cash Value policy may not cover the entire amount required to rebuild your home in a total loss situation so that should be considered when purchasing a policy.