What Is Insurance to Value?
The insurance to value (ITV) ratio compares the cost of rebuilding your home to the amount of dwelling coverage you have. Knowing your insurance to value allows you to determine whether your home is adequately insured. Here's everything you need to know about insurance to understand its worth, including why it's important, how it works, and how to make sure you have enough.
Definition and Examples of Insurance to Value
Insurance to value tells you how much of the cost of rebuilding your home your insurer will cover in the event of a covered claim. If you insure your home for less than its full replacement cost (100 percent ITV), you may be underinsured in the event of a total loss. Because your home insurance only covers costs up to the limits of your policy, if rebuilding costs exceed those limits, you'll have to pay the difference out of pocket. On the policy declarations page, your limits are usually listed under "Coverage A" or "Dwelling Coverage." Remember that regardless of your dwelling coverage levels, you will almost certainly be required to pay deductibles following a claim.
How Insurance to Value Works
ITV is typically expressed as a percentage, representing the proportion of the reconstruction cost that the insurer will pay if your entire home must be rebuilt following a covered loss. Assume the cost of rebuilding your home is $100,000, and you have replacement cost coverage with an 80 percent ITV and a 1% deductible. That means your home insurance will cover $80,000 of the rebuilding costs, with a $800 deductible. If your home is declared a total loss as a result of a covered claim, the insurer will pay $79,200 ($80,000-$800), and you will be responsible for the remaining $20,800.
What if, instead of a total loss, the same house suffered a partial loss requiring $10,000 in repairs? Because your policy covers $80,000, you'd only have to pay your $800 deductible, and your insurer would cover the remaining $9,200.
Replacement Cost vs. Actual Cash Value
The amount you receive after a covered claim depends on whether you have replacement cost value or actual cash value (RCV or ACV) coverage on your home. Both RCV and ACV insure your home for the cost of rebuilding or repairing it up to the policy limits, but ACV deducts depreciation due to the age and condition of your home. ACV coverage pays out the house's fair market value at the time of the loss in covered claims—which is frequently insufficient to completely replace or repair a home.
RCV coverage, on the other hand, pays to replace or repair your home with similar type and quality items, such as replacing damaged plaster walls with drywall. Because there are different levels of RCV coverage, it's critical to consult with your insurance agent to determine which one best suits your needs and budget.
In general, HO-1 and HO-8 home insurance policies cover the ACV of your home, whereas HO-2, HO-3, and HO-5 policies cover the replacement cost value (RCV). The most common type of home insurance policy is a HO-3.
How To Ensure You Have Enough Insurance
It's ideal to have full replacement cost coverage on your home so you don't have to pay tens of thousands of dollars out of pocket to rebuild after a loss. However, the estimated replacement cost value on your policy must be accurate in order to avoid under- or over-insuring your home. You can calculate how much it would cost to rebuild your home by:
- Inquire with local licensed home builders about rebuilding costs per square foot in your area.
- Multiplying the square footage of your home by $150 (the average rebuilding cost of a typical single-family home).
- Using online construction cost calculators.
- Purchasing an industry reference guide, such as Craftsman's 2021 National Building Cost Manual.
- If you're purchasing a new policy, ask your home insurance agent for a rebuilding cost estimate or a physical inspection.
- Hiring an appraiser will provide you with the most accurate answer.
It's a good idea to consult with your insurance agent once you've determined the rebuild value of your home. Your home's unique features, such as wider floorboards, period doorknobs, or custom cabinetry, may necessitate changes to your policy's home value or insurance coverage options.
Make it a habit to review your ITV ratio with your agent on a regular basis, as well as to notify them of any home improvements or updates, so you can be confident you have the appropriate amount of coverage.