Comparing Replacement Value Method and Market Value Method

Introduction:

Our home is our safe space, our personal den. It is where we can be ourselves. At the end of a tiring day, we look forward to getting home and replenishing our energy. Homes are also our most prized assets. So it is no surprise that we also do our best to protect our houses against the forces of nature and humans. We get the best locks, hire the best security and make use of technology to combat uncertainties and unpredictable circumstances. Having said that, it is impossible to pre-empt each and every possibility and disaster, so it is just as important to financially protect against unforeseen damages and buy home insurance. Home insurance gives you the option to secure both the structure of your house as well as the contents inside it, depending upon the kind of policy you choose.

When you are out to buy home insurance, you will be required to make major decisions, one of them revolving around the magnitude. How much insurance would you need to cover for the expenses if something were to happen to your dear home? You might be inclined to assume that the amount you paid for your house would be enough to cover for damages or to find a new one, but that is not an accurate measurement in most cases.

To find out the quantum of insurance you’d like to draw over your house, there are different valuation methods: replacement value vs market value. Let’s look at these modes in detail:

Market Value method, as the name suggests, refers to the market price of the house. According to the Insurance Regulatory Development Authority of India¹, this is the actual cost at which you bought the house. So, if there is any damage to the house – say it gets dilapidated in an earthquake, you will file for an insurance claim. When the insurance company values the house, it will deduct the amount of depreciation for the number of years you’ve held the house. This is done in order to account for the wear and tear that a property undergoes in a stretch of time. This method of property valuation for insurance seems fair from a financial accounting viewpoint. But the amount at which the insurer arrives after all the calculations may not be sufficient for you to get a replacement. You will end up having to pitch in – in which case you will suffer a financial blow in addition to the emotional toll of the damage.

On the other hand, the replacement cost is the price or the expenses that replacing a damaged house or rebuilding it or finding a substitute would incur. No depreciation is levied in this case. Assume that the house you live in is ravaged in a fire. Now the cost of building the exact same house – in the same location and spot, with the same dimensions, same construction design – will be the replacement cost.

This mode of valuation seems fairer from the compensation standpoint. If the aim of insurance is really to compensate for the loss and allow the sufferer of the loss to rebuild their life, then replacement costs.

What is advisable?

Of course when an asset as massive as property is damaged, it is an enormous blow for you. It can take an emotional and financial toll on you, so it is always advisable to get insured up to the best amount. If it is a question of replacement value vs market value, then it is best to get a replacement estimation. When you file for claim, you are already going through a difficult time – you would not want to fall short of funds. Therefore, replacement cost valuation might be the best in terms of coverage.

What this means is that your home should ideally be insured to the totality of the replacement costs – that way you can rebuild the entire house and aim to restore it to its original glory.

Buy home insurance from a place that understands the value of a home – that it is more than just 4 walls put together, that it contains memories and moments for you, that there’s more to the brick and mortar than just the structure. A home insurance policy from Bajaj Allianz General Insurance available on Bajaj Markets is the best way to protect your literal safe space from unforeseen risks and damages.

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