We get this question a lot from New Home Buyers purchasing home insurance for the first time because the purchase of their home may be higher than the Dwelling Coverage on their home insurance policy. Lenders want you to carry enough insurance to cover the loan on your home. But, this is not the intended purpose of your home insurance.
Home Insurance is designed to replace or rebuild your home. Your purchase price is the value in which someone is willing to pay for the home. These different values do not always align.
The Home Insurance Company develops a replacement cost estimate to determine what a home would cost to rebuild in today’s labor and material market. The estimate uses variables such as age of home, style of build, square footage, quality of materials, # of bathrooms, type of siding used, type of garage, age of roof, location, etc. With this cost estimate, the insurance company determines the Dwelling Coverage limit or the amount it believes it would cost to rebuild the home from the ground up. This is known as coverage “A” in your home insurance policy.
The purchase price may be higher or lower than the replacement cost limit depending on the real estate market. One of the best examples is lake property. Lake property is typically valued higher because the desire to live on a lake is higher and the demand is there for it. Because people are willing to pay a much higher amount to live on a lake does not mean it will cost more to rebuild that home. The land value is higher.