Replacement cost vs. market value: What homeowners insurance really covers
You check Zillow and see your home’s value jump overnight. It feels great. But then you wonder: Does my homeowners insurance cover that higher number? This is one of the most common — and confusing — questions homeowners have.
What does “market value” mean?
Market value is what a buyer might pay if you sold your home today. It’s based on things such as:
- Your school district
- The popularity of your neighborhood
- Local home demand
- The land your house sits on
But those things aren’t a consideration when we’re talking about homeowners insurance.
Why? Because your insurance doesn’t need to rebuild your land, your ZIP code or your school district. Those are parts of your market value, but they aren’t part of your home’s actual structure. That’s why market value is not the number your policy uses.
What is “replacement cost”?
Replacement cost is the amount it would take to rebuild your home as it was before a covered loss. Same size, same quality, same materials. This is the number your homeowners insurance considers.
Replacement cost is based on real construction-related costs like:
- Building materials
- Labor Contractor fees
- Permits and inspections
One thing to note: In a hot housing market, the selling price can be much higher than the replacement cost. And in rural areas, or in older homes built with custom or unique materials, the replacement value can be much higher than market value. These things will also affect the rate you pay for your insurance.
| Market value (selling Price) | Replacement cost (rebuild price) |
| Based on real estate demand | Based on construction costs |
| Includes land and neighborhood | Includes only the structure |
| Can rise or fall quickly | Focuses on current building prices |
| Used when buying/selling a home | Used by your insurance company |
Why your insurance doesn’t use market value
Homeowners insurance is built around indemnity, which means that your insurer’s job is to put you back where you were before the damage happened — not pay you what someone would pay for your home if they were to buy it from you.
Additionally, mortgage lenders require you to insure the cost to rebuild your home, not the price you could sell it for. This ensures that the home can be repaired if something major happens.
How to make sure you’re covered correctly
You don’t need to guess your replacement cost, but you should keep an eye on it. Here’s how:
- Review your policy each year. Building costs can change quickly. Check your coverage amount during your annual renewal.
- Update your insurer after major upgrades. Have you renovated your kitchen? Added a deck? Those changes will affect your rebuild cost.
- Choose the right coverage type. Ask your insurer about options like replacement coverage, which is the most common, or extended replacement cost, which is extra protection in case building costs spike.
The goal isn’t to match your home’s selling price. It’s to make sure you can rebuild after a major loss.
Ready to feel more confident about your home’s coverage? If you’re thinking about reviewing your homeowners insurance, explore coverage options from TruStage®.
