How Much Does It Cost To Rebuild Your House?

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How Much Does It Cost To Rebuild Your House?

A tornado rips through your neighborhood and demolishes your home. Once you recover from the initial shock of the disaster, you decide to rebuild your house. But how much will it cost to rebuild it? More importantly, how does your home insurance company estimate the cost? It’s essential to know the answers to these questions before disaster strikes.

Here’s why: If your dwelling coverage amount is lower than the cost to rebuild, your claim won’t pay enough money to cover the full cost of replacing your home.

Dwelling coverage is the portion of a homeowners insurance policy that pays to fix or replace your house if damaged. The dwelling coverage amount should equal the cost to rebuild your house, based on local materials and labor costs. If the dwelling coverage is insufficient, you’ll be underinsured. For instance, if you have $300,000 in dwelling coverage, but it costs $320,000 to rebuild, you would have to pay the $20,000 difference—or cut costs by reducing what is replaced.

Typically, estimating rebuilding cost is done by your home insurance company because it’s a complex calculation. Here we explain how it’s done.

Estimating the Cost of Rebuilding a House

Many insurers use their own sophisticated calculators to estimate the cost of rebuilding a house, says Kelly Rush, director of home solutions at LexisNexis Risk Solutions, a provider of technology and analytics for insurers and other companies.

To arrive at a final cost estimate, an insurer might supplement numbers generated by those calculators with data from outside sources, as well as software they buy from outside vendors, says Rush.

One of the insurance companies, relies on third-party tools to help estimate rebuilding costs. These tools typically weigh factors such as a home’s:

  • Type of construction
  • Type of roof
  • Age
  • Square footage
  • Quality of building materials

Rush says other factors can include the number of bedrooms and bathrooms, local building codes and ordinances, and even the quality of fixtures, flooring and molding.

Chapman says Farmers annually reviews material costs (such as the price of lumber and concrete), labor costs and other homebuilding expenses to help ensure cost estimates accurately reflect inflation. This analysis could result in a homeowner’s dwelling coverage limits being raised. In the U.S., it costs roughly $300,000 to build a home, although recent labor and supply shortages may lead to a much higher cost.

To help its insurance company customers create rebuilding cost estimates, LexisNexis Solutions taps into its industry-wide insurance claims and policy databases, according to Kelly. This data is then fed into proprietary algorithms that include figures on local material and labor costs. The resulting information might be coupled with local claims and policy data to fine-tune and finalize the cost estimates.

Rising Inflation and Building Costs Can Leave You Underinsured

Most homeowners haven’t taken precautions to make sure their home insurance coverage is keeping pace with current inflation and building costs. An out-of-date coverage amount could leave you underinsured.

A recent American Property Casualty Insurance Association survey of over 1,000 homeowners found that only 30% of homeowners have purchased additional coverage or increased coverage limits to help bridge a potential gap in current rebuilding costs and their actual coverage. Another issue is that 40% who completed renovations or remodels said they haven’t updated their homeowners insurance to cover the home’s added value.

Here are ways to make sure your home insurance limits are reflecting rising costs:

  • Have inflation adjustment coverage, which automatically updates your dwelling coverage each year at renewal time based on inflation.
  • Contact your home insurer to ask for a re-evaluation of your coverage amount based on current rebuilding costs.

Add extended or guaranteed replacement cost coverage to your homeowners policy—if your company offers it. These upgrades will provide an extra coverage amount above your dwelling coverage limit in cases where it turns out you are underinsured. The survey found that most homeowners haven’t added either type of expanded coverage or aren’t sure if they have it.

What’s the 80% Rule for Home Insurance?

Ideally, your dwelling coverage will match the rebuilding-cost estimate—and some insurance companies may require it. But at the very least you’re likely going to need dwelling coverage that’s at least 80% of the replacement cost. This is called the “80% rule.”

Many homeowners follow the 80% rule when first purchasing a policy. But the replacement cost may go up if they remodel or renovate. If the dwelling amount isn’t adjusted to reflect that, their coverage amount can slip under 80% of the replacement cost.

If your house isn’t insured for 80% of its replacement cost, your insurance company may not cover the entire cost to fix your damage if you file a dwelling claim.

For example, suppose the replacement value of your house is $300,000. Eighty percent of that is $240,000, or the amount your insurer would want under the 80% rule. But let’s say it’s insured for $180,000, or 60%. Then, a fire causes $150,000 in damage. You may think you’re all set because your coverage amount exceeds the damage by $30,000. But you’d likely be wrong.

Your insurance company might divide the amount of coverage you bought ($180,000) by 80% of the replacement cost value ($240,000), or what you should have insured it for: ($180,000/$240,000 = 75%). In this case you could be reimbursed for 75% of your damage. Seventy-five percent of the $150,000 in damage is $112,500.

Let’s also assume you have a $1,000 deductible. That means your insurance company would pay $111,500, leaving you on the hook for the remaining $38,500: ($150,000 – $111,500 = $38,500).

Where Should You Get Replacement Cost Estimates?

Policyholders should rely on their home insurance companies for the most accurate estimates of rebuilding costs. For one thing, Rush says, an insurer’s experience and access to data “are extremely hard to replicate.”

A cost estimate calculated by a contractor or consumer stands the chance of being too broad or too limited, according to Rush.

Reviewing Your Home Insurance Coverage

To make sure you’re not underinsured, Chapman from Farmers suggests you review coverage amounts once a year to make sure they’re still accurate.

Rush from LexisNexis stresses a couple of reasons why you should review your coverage regularly.

Severe weather is becoming more frequent

Weather- and climate-related disasters in the U.S., such as tornadoes and hurricanes, are rising in severity and frequency. In 2021, the U.S. experienced 20 billion-dollar weather and climate disasters. That puts 2021 in second place (behind 2020) for the most major disasters in a given year and in third place (behind 2005 and 2017) for the total costs of major disasters.

Spikes in materials cost

The housing market is still reeling from pandemic-induced supply-chain hiccups and labor shortages, which has created a surge in cost and demand. For instance, the rise in lumber prices since the summer of 2021 has added more than $18,600 to the price of a new home, according to the National Association of Home Builders.

When a natural disaster strikes, such as a wildfire, the increased demand for repairs can cause a jump in local building costs. These costs can be exacerbated by supply-chain woes and already-rising material expenses. That means the coverage you bought yesterday might not be adequate for rebuilding tomorrow.

Considering Extended or Guaranteed Replacement Cost Coverage

You can help ensure that you have enough home insurance to rebuild your house by finding a home insurance company that offers extended or guaranteed replacement cost coverage.

Extended replacement cost coverage

Extended replacement cost coverage provides an extra percentage of coverage above your dwelling limit. For example, let’s say your extended replacement cost coverage adds 25% to your dwelling coverage amount. If your dwelling coverage is $300,000, you would get up to $375,000 to rebuild your house, if needed. Keep in mind that your insurance company also subtracts the deductible amount you chose from a claim payout.

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