If you own property, choosing a homeowner’s insurance policy that fits your needs is important. There are policies that offer a large amount of financial coverage and depending on the type of property to be insured, it may make more financial sense to pick a policy that still offers adequate coverage while having lower premiums.

Properties can be covered in a variety of ways, and several factors can determine if your property’s value goes up or down each year.  Knowing how much your property is worth and obtaining the insurance policy that both protects you and suits your financial needs is important. The following are descriptions of types of policies and valuation, and the costs that they generally cover.

Market Value

Simply, market value describes the estimated amount that a property would sell for on the date of valuation. Any land included in a property is also a part of its market value. The term market value can be used interchangeably with open market value, fair market value or fair value.

Several factors are considered when a property’s market value is appraised, some of which cannot be influenced by the buyer, seller or appraiser. These include the location of the property, capitalization rates, rent growth rate, the general state of the real estate market and more.

Market value is most often used when buying or selling a property. However, it may also be examined when determining the type of insurance policy to place on a property, or the amount of compensation in the case of a loss.

Replacement Cost

Replacement or reconstruction cost is a type of insurance that covers the cost to replace or repair a building with materials of the same or comparable quality. For the purposes of coverage—unlike market value—replacement cost policies do not include the value of any land and is determined based on the amount needed to hire contractors and purchase materials to repair a building or construct a replacement.

The replacement cost of a property will differ from the market value, as the replacement cost only has to take building materials and labor into consideration when determining coverage. However, the costs of materials and labor can fluctuate. This makes it possible for the replacement cost of a property to be higher than its market value.

A replacement cost policy offers a large amount of financial protection in the case of a loss, as it does not take depreciation into account when determining compensation. However, it is usually more expensive than other types of coverage and, as a result, may not make sense for every property.

Which Type of Coverage Best Fits Your Needs?

Knowing your property’s value and obtaining the policy that best suits your needs will safeguard your current and future assets.  Partner with a trusted advisor to discuss your options.