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.
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.
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. 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.
