Massachusetts homeowners insurance premiums are calculated based on a variety of factors. Some have to do with the home itself and others with you as a homeowners. One of the most important factors is the value of the home, but this is not based on your purchase price. Here’s what you should know about home values used to calculate insurance premiums.
Replacement Value versus Market Value
When you purchase a home, the purchase price reflects the market value. Market value fluctuates up and down with real estate market conditions. It includes both the cost of the land and building(s). This is not the same figure used for insurance purposes.
Insurance companies calculate the replacement value of your home. This would be the cost to rebuild the structure if there was a total loss due to fire or other covered incident. It does not include the value of the land on which the home sits. Thus, the replacement value is always less than the total market value of a property.
Calculating Replacement Value
Home replacement values are not static figures based on bedrooms, bathrooms, square footage, etc. After all, a high end home and a low end home could have the same amount of space but the cost to rebuild them would be very different. Insurance companies use different algorithms to estimate replacement cost. They take into account the age of the systems (roof, heating system, etc.). The purchase price may be used as well by subtracting the value of the land from that figure. Replacement value may vary slightly from one insurance company to another.
Home Values Used to Calculate Insurance Premiums – Is Yours Sufficient?
Although a lower replacement cost would result in a lower insurance premium, this is not necessarily beneficial. Homeowners should aim to have enough coverage to repair or replace their home back to it’s original condition before the disaster. A low replacement value may not provide enough funds to do so. It’s important to review your Massachusetts homeowner’s insurance coverage for both it’s covered replacement value and for what incidents are specifically covered by the policy. Don’t wait for a disaster to learn that your policy was insufficient.
