I ask this question at every home insurance review, and nine times out of ten, people get it wrong. They think market value – what their house would sell for – is what the insurance company will write a check for. It’s not. Not even close.
A friend of mine – let’s call him Tony – learned this the hard way. Tony lived in a bungalow in Berwyn. He bought it in 2018 for about $250,000. By 2024, similar houses on his block were selling for about $320,000. He thought he was covered for about $320,000. Then a fire started in his garage – faulty wiring – and spread to the main house. The damage was extensive. He filed a claim.
The adjuster told him his dwelling coverage was about $280,000. That’s what his policy said. He had never updated it since he bought the house. The estimated rebuild cost came in at about $410,000. That’s a about $130,000 gap. He would have to pay that difference out of pocket. He called me, panicked.
“I thought insurance was supposed to make me whole,” he said. It is – but “whole” means rebuilding the house you had, not buying a comparable house on the market. Market value includes the land, the location, the neighborhood. Replacement cost is just the bricks, lumber, labor, and fixtures. Those two numbers can be wildly different.
In Tony’s case, land values in Berwyn had gone up faster than construction costs. So his market value was $320k, but his replacement cost was $410k. He was underinsured by $130k. He had to take out a construction loan to cover the difference. He’s still paying it off.
So how do you avoid this? You need to know your home’s actual replacement cost, not the tax assessment, not the Zillow estimate, not what your neighbor sold for.
Use the Home Insurance Valuator. It’s free and takes about fifteen minutes.
I ran Tony’s house through the valuator after the fact. It spit out about $390,000 – close to the adjuster’s $410k. His policy said $280k. He was underinsured by about 30%. That’s the danger zone. Many policies have a “coinsurance” clause: if you’re underinsured by more than a certain percentage, the insurer will reduce your claim proportionally. Tony was lucky they paid the full limit; some carriers would have penalized him.
Now, what about actual cash value? That’s even worse. Some older policies pay ACV instead of replacement cost. ACV is replacement cost minus depreciation. A ten-year-old roof that costs about $15,000 to replace might have an ACV of about $3,000. If you have a claim, you get about $3,000 – nowhere near enough. Never buy ACV coverage on a home. Always demand replacement cost.
I remember a woman named Patricia. She had a 1920s Craftsman in Oak Park. Her policy was ACV – she didn’t know. A tree fell through her roof during a storm. The adjuster estimated about $25,000 to repair. Her policy paid about $8,000, because of depreciation on the old roof and siding. She was devastated. We switched her to replacement cost the next year, but that claim still hurt.
The difference in premium between ACV and replacement cost is usually small – maybe 10-15%. The difference in claim payout can be 50-70%. Don’t be penny-wise and pound-foolish.
Another common gap: extended replacement cost. Even with replacement cost coverage, most policies have a limit – usually 20-30% above your stated dwelling coverage. So if your policy says about $300k and you have 25% extended replacement cost, you actually have $375k for rebuild. That’s good. But after a major disaster – wildfire, hurricane, tornado – construction costs can spike. Everyone in the region is rebuilding at once, driving up labor and material prices. Extended replacement cost might not be enough.
That’s where “guaranteed replacement cost” comes in. Some carriers offer a rider that promises to pay whatever it takes to rebuild your home, no cap. It’s more expensive, but if you live in a high-risk area, it’s worth considering. Few carriers offer it anymore, but it exists.
For most people, standard replacement cost with 25-50% extended coverage is enough. But you need to update your dwelling coverage every few years. Construction costs change. Your kitchen remodel added value. A new roof or HVAC system changes the rebuild cost. Don’t just let your policy auto-renew with the same numbers.
Someone I worked with – let’s call him Mark – had a 1970s split-level. He added a sunroom and finished the basement. He never told his insurer. A fire damaged both the original house and the new addition. His policy paid for the original structure but not the sunroom or basement – because those weren’t listed as covered improvements. He had to fight for months and ended up with only half the cost of repairs.
So every time you do a major renovation, call your agent. Update your dwelling coverage. It might increase your premium a little, but it’s far cheaper than paying for a rebuild out of pocket.
Now, what about personal property? That’s the stuff inside your home – furniture, clothes, electronics, appliances. Most policies cover personal property at 50-70% of your dwelling coverage. If your dwelling is about $300k, you might have about $150k for contents. That sounds like a lot. But start adding up: a couch (about $2k), bed (about $3k), dining table (about $1.5k), TV (about $1k), clothes (about $5k per person?), kitchen appliances, tools, art, electronics. It adds up fast.
The Coverage Gap Calculator includes a personal property section.
Take an hour this weekend. Walk through each room with your phone. Video every drawer, closet, and shelf. Describe items out loud. Then upload the video to the cloud. That’s your inventory. If you ever have a claim, you have proof.
I had a client named Linda. She did the video inventory. Two years later, her apartment building had a fire. She lost everything. She sent the video to her adjuster. Her claim was settled in three weeks for the full policy limit. The adjuster told her “you’re the easiest claim I’ve ever handled.” That video saved her months of stress.
One more thing about personal property: actual cash value vs. replacement cost applies here too. Many policies use ACV for contents unless you buy a replacement cost endorsement. That endorsement costs a few dollars a month. Buy it. Without it, your five-year-old laptop that cost $1,500 is worth maybe $200. With it, you get $1,500 to buy a new one.
So let me give you a checklist.
First, determine your home’s replacement cost. Use the Home Insurance Valuator or hire an appraiser. Don’t rely on your tax assessment or real estate agent.
Second, set your dwelling coverage to at least that number. Add 25% for extended replacement cost if available.
Third, choose replacement cost coverage on your dwelling and your personal property. Avoid actual cash value.
Fourth, do a video inventory. Store it off-site.
Fifth, review your policy every two years and after any major renovation.
I’m not saying you need to become an insurance expert. You just need to avoid the $100,000 mistake. Tony’s $130k gap could have been fixed with a fifteen-minute phone call. He just never made the call.
Here’s what I want you to do tonight. Find your homeowners declaration page. Look for the “Dwelling Coverage” amount. Then open the Home Insurance Valuator. Compare the numbers. If your policy is within 10% of the valuator’s estimate, you’re fine. If it’s off by 20% or more, call your agent tomorrow. Don’t wait.
P.S. Tony’s house is rebuilt now. He has a new policy with about $440k in dwelling coverage. His premium went up by about $240 a year. That’s about $20 a month. He told me “I would have paid double to avoid that construction loan.” Learn from him.
By Marcus
