How Much Flood Insurance Coverage Do I Really Need?

Updated: Jan 13

Replacement Cost vs. Market Value

One of the most important things when buying insurance for your home or business is determining just how much coverage you will need. To be adequately protected, you should maintain enough coverage to rebuild your home from the ground up, which is otherwise known as replacement cost.

While people often confuse their home’s market value with its replacement cost, the two are not the same. Not grasping the difference could lead to over or underinsuring your property, either of which could cost you in the long run. So, what is the difference?

Market Value

Market value is the price you could sell your home for in the current real estate market. It is determined not only by the size and quality of your home, but also the land it sits on, and perhaps most importantly, location, location, location! A home situated in a coveted upscale or trendy neighborhood, could fetch double or triple what the same home might sell for if located in a less desirable neighborhood. But, what you could sell your home for on the open market is often a far cry from its replacement cost value.

Replacement Cost

Replacement cost is the amount of money it would take to rebuild your home in today’s market at its current location using similar materials, construction techniques, and design features. In general, it is calculated by adding up the cost of materials, labor, and fees for both professional services and any necessary permits. Factors that affect your home’s replacement cost include its size, age, and the quality of the materials and finishes used in its construction. It does not account for the value of land your home sits on, or the appeal of the neighborhood it is located in.

Replacement costs can vary based on where you live and the demand for materials and labor in your area. The National Association of Home Builders estimated the average build price to be between $100 and $155 per square foot depending on location. The northeast has the highest average square footage costs around $155, while the south has the lowest at $100.

Getting the Right Insurance Coverage

Since your insurance policy is intended to return your home to the state it was in prior to a covered loss, it is important to know how much it will take to get it there. An accurate replacement cost estimate can prevent you from either underinsuring your home or paying too much for insurance coverage you won’t need.

An independent appraisal is usually the most accurate method for determining a home’s replacement cost but could cost a few hundred dollars. There are also replacement cost calculators available online that you can use to assess your home’s replacement cost yourself. These calculators take several important factors into consideration, such as:

  • Age of your home

  • Square footage

  • Roofing material

  • Number of stories

  • Architectural features foundation type

  • Quality of fixtures and finishes

Weighing in Economic Conditions

Although market value and replacement cost are different, both are affected by economic conditions, including inflation. A growing demand for housing can impact the market value of your home, while an increasing need for labor and materials coupled with dwindling supply (think COVID fueled lumber shortage of 2021.) could significantly alter its replacement cost. Since market conditions can cause your home’s estimated replacement cost to fluctuate, it is important for review your insurance policies regularly and re-evaluate to make sure you still have adequate coverage.

Whether you’re shopping for a homeowner’s policy or flood insurance for your property, understanding what replacement cost is and how to it’s determined will help you select the coverage that is right for you. If you’re unsure if you need flood insurance, use our Flood Zone Lookup tool to find out if you’re in a flood zone. Even if you’re just outside of one, you may want to get coverage. No Flood Zone does not equate to No Risk! Every situation is different, so if you need help, give our Flood Experts a call at 866-503-5663.

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