Does Replacement Cost Impact Insurance Premiums?

Replacement cost is the amount of money it would cost to rebuild your home from the ground up in the event of a total loss. Does the cost to rebuild your home impact your insurance premium? Absolutely. The higher the cost to rebuild a home, the larger the risk an insurance company assumes. The larger the risk, the higher the premium.

How Replacement Cost Impacts Insurance Premiums

Replacement cost is the cornerstone of home insurance premium calculations as it determines the payout that insurance companies are willing to give out to replace a home in the event of a total loss.

There are a number of factors used to determine replacement cost; size, age, and finishes to name a few.

Replacement cost for a 1,200 square foot, two-bedroom bungalow built in 1973 may have basic finishes associated with 1970s design and building practices and could have a replacement cost of $350,000.

In comparison, a 3,200 square foot, seven-bedroom home built in 1917 may have historic features and mouldings synonymous with early 1900s architecture that would be costly to replace. The replacement cost for a larger, 3,200 square foot historic home could be upwards of $1,500,000. When your home has special features like mouldings or custom windows, it impacts your replacement value and your insurance premiums.

Replacement Cost is Calculated and Applied to Your Coverage

Regardless of which coverage option you choose for your homeowner’s policy, actual cash value, or replacement cost insurance, a replacement cost for your home is always calculated and used as a baseline for determining other coverages in your policy.

A percentage of your home’s replacement cost is used to determine the amount of coverage for your home’s contents and detached structures. The higher the replacement cost value of your home, the higher the corresponding coverages; thus, increasing the risk assumed by the insurance company.

When calculating home insurance premiums, Canadian insurance companies will examine the potential payout of a claim, as well as the likelihood that a claim will occur.

How Do Upgrades or Renovations Impact Insurance?

Homes are constantly changing in value. Renovations on a home can impact replacement costs and insurance premiums on the home. It’s important to keep your insurance company informed about the renovations as it could change your original policy. If the replacement value rises above what was originally agreed to, it might not be covered.

Using a home replacement cost calculator can help determine what the value of the renovation. After the value has been determined, you can go to your provider and discuss changing your policy.

Additional Factors That May Impact Your Insurance Premium

In addition to replacement cost, factors that affect insurance premiums can include:

  • Claims history of the house itself,
  • Claims history of the homeowner,
  • The specific geographic location of the home,
  • The type of wiring and plumbing,
  • Additional features, such as: fireplaces, porches etc.

All these factors contribute to the potential of a loss and thus impact the premium as well.

In short, the higher the replacement cost of the home, the higher the additional coverages, the higher the associated insurance premium.

Get an Accurate Estimate of Your Replacement Cost

The key to keeping your insurance premiums from inflating is ensuring your replacement cost is accurately calculated. Carefully developed by leading industry professionals, the Douglas Residential Cost Guide will allow you to accurately estimate your replacement cost, allowing you to rest easy knowing your insurance premiums reflect the perfect amount of coverage needed to protect your home and your family, nothing more, nothing less.

Get an accurate estimate of your home’s replacement cost today using the Douglas Residential Cost Guide.