What Is Insurance to Value?

Insurance to Value Explained in Less Than 5 Minutes

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Insurance to value (ITV) represents how your home’s dwelling coverage amount compares to the cost of rebuilding it. Knowing your insurance to value helps you judge whether your home has adequate insurance coverage. Here’s everything you need to know about insurance to value, including why it’s important, how it works, and how you can make sure you have enough.

Definition and Examples of Insurance to Value

Insurance to value tells you how much of your home’s rebuild cost your insurer will pay under a covered claim. Insuring your home for any amount less than its full replacement cost (100% ITV) may mean you’re underinsured in the event of a total loss. That’s because your home insurance only covers costs up to your policy’s limits, so if rebuilding expenses are higher than those limits, you’d have to pay the difference out of pocket. Your limits are usually listed under “Coverage A” or “Dwelling Coverage” on the policy declarations page. Remember that you’ll most likely have to pay deductibles following a claim, regardless of your dwelling coverage levels.

Your home’s rebuilding cost is different from its market value. The rebuilding cost is based on the prices of materials and labor required to replace your home. Market value depends on variables such as the economy, your home’s condition and age, and nearby property values.

  • Acronym: ITV

How Insurance to Value Works

ITV is usually written as a percentage, which represents the proportion of the reconstruction cost the insurer will pay if your entire home needs to be rebuilt after a covered loss. Say your home will cost $100,000 to rebuild and you have replacement cost coverage with an 80% ITV and a 1% deductible. That means your home insurance covers $80,000 of the rebuilding costs and your deductible is $800. If your home is declared a total loss after a covered claim, the insurer would pay out $79,200 ($80,000–$800), and you’d be responsible for the other $20,800 needed to rebuild your home.

What if, instead of a total loss, the same home had a partial loss that required $10,000 worth of repairs? Since your coverage is for $80,000, you’d only have to pay your $800 deductible and your insurer would pay the other $9,200.

Replacement Cost vs. Actual Cash Value

Whether you have replacement cost value or actual cash value (RCV or ACV) coverage on your dwelling makes a big difference in how much you’ll receive after a covered claim. Both RCV and ACV insure your home for the cost of rebuilding or repairing up to your policy limits, but ACV subtracts depreciation due to your house’s age and condition. In covered claims, ACV coverage pays out the house’s fair market value at the time of the loss—which often isn’t enough to completely replace or repair a home.

In contrast, RCV coverage pays to replace or repair your home with items of similar type and quality, such as replacing damaged plaster walls with drywall. Because there are various RCV coverage levels, it’s important to talk to your insurance agent about which one fits your needs and budget.

Generally, HO-1 and HO-8 home insurance policies cover your home for its ACV, while HO-2, HO-3, and HO-5 policies include replacement cost value (RCV) coverage. An HO-3 is the most common type of home insurance policy.

Many insurers require an ITV of at least 80% to issue replacement cost coverage. If your ITV is lower, you may be issued actual cash value coverage instead. Your mortgage lender may also require a certain ITV percentage as a condition of the loan.

How To Ensure You Have Enough Insurance

It’s ideal to have 100% replacement cost coverage on your home so you don’t have to pay tens of thousands of dollars out of pocket to rebuild your home after a loss. But the estimated replacement cost value on your policy also has to be accurate to help you avoid under- or overinsuring your home. You can estimate how much your home would cost to rebuild by:

  • Contacting local licensed homebuilders for per-square-foot rebuilding costs in your area.
  • Multiplying your house’s square footage by $150 (the average rebuilding cost of a typical single-family home).
  • Using online building cost calculators.
  • Buying a reference guide from an industry source, such as Craftsman’s 2021 National Building Cost Manual.
  • Asking your home insurance agent for a rebuilding cost estimate, or for a physical inspection if you’re buying a new policy.
  • Hiring an appraiser, which will give you the most accurate answer.

Once you know your home’s rebuild value, it’s helpful to talk to your insurance agent. Your home may have unique characteristics like wider floorboards, period doorknobs, or custom cabinetry that require adjustments to your policy’s home value or your insurance coverage options.

Local building codes may have changed since the last time you evaluated your home’s rebuilding cost, making it more expensive to rebuild to current standards. Some insurers offer “ordinance or law coverage” that pays the additional costs of meeting current building regulations.

Make it a habit to review your ITV ratio with your agent regularly and notify them of any home improvements or updates so that you can be confident you have the correct amount of coverage.

Key Takeaways

  • Insurance to value (ITV) is how much of your home’s rebuilding cost an insurer will pay for in a covered claim.
  • Your insurer only pays the full home replacement cost (minus your deductible) in total losses if you have an ITV of 100%. If your ITV is lower, you’d be responsible for the difference in reconstruction costs, in addition to paying your deductible.
  • If your dwelling has actual cash value (ACV) coverage, insurers will subtract your home’s depreciation value from the payout. Replacement cost value (RCV) coverage is not affected by depreciation, and pays for materials of a similar kind and quality when rebuilding or repairing damage.
  • Insuring your home for 100% of its ITV and having an accurate replacement cost are essential to making sure you have adequate home insurance coverage.