When determining how much coverage you need for your dwelling, most insurance companies require an agent to run a replacement cost calculation to determine the value or the amount it would cost to replace the building structure. The replacement cost is the amount the home needs to be insured for.
You are required to maintain your home’s insurance amount within 80% of the calculated replacement cost value. Additionally, most insurance companies now also have an automatic inflation guard built into the policy, usually around 4%. This allows the coverage on your dwelling to increase each year to keep pace with inflation and the subsequent higher replacement costs.
Keep in mind that insurance value is mush different than the market value of your home. Homeowner’s insurance is insuring the cost to rebuild your home. Replacement cost includes everything that would be required to rebuild the home in case of total loss including demolition, debris removal, ordinance and legal fees, the cost of labor and materials.