What Higher Reconstruction Costs Means For Home Insurance

WRITTEN BY: Mark Romero


If your home is destroyed, you need the most financial assistance from your insurance possible. Especially with inflation surging, you need to make sure you get the coverage you need. To learn more about reconstruction costs and how they impact the cost of homeowner’s insurance, keep reading.

What are Reconstruction Costs?

Unfortunately, sometimes natural disasters strike, destroying the homes of innocent people. Reconstruction is what takes place after homes are destroyed. Reconstruction costs are the price of rebuilding your home from the ground up after a tragedy. 

The cost of home insurance can be broken down into two main factors: 

  1. The cost of materials
  2. The cost of labor 

It is important to know how much your house is worth before disaster strikes, so you can get the best possible assistance from your insurance company.

How are Reconstruction Costs Estimated?

The dwelling coverage amount is the value of your home not including the land it’s on. If your home is estimated to have a value of $400,000 and your dwelling coverage is only $375,000 then the other $25,000 would have to come out of your pocket in order to rebuild your home exactly the way it was after a natural disaster. 

Reconstruction costs are usually estimated by: 

  • Type of roof
  • Total square footage
  • Quality of building materials
  • Age of your home

What Do Reconstruction Costs Have To Do With the Cost of Home Insurance?

Most home insurance policies include two coverages: 

  1. The actual cash value of your home and property
  2. The cost of rebuilding your home’s physical structure. 

It’s important to review the reconstruction costs annually because otherwise, one of two things can happen:

  1. You could underestimate the value of your home, leading to more money coming out of your pocket during a reconstruction (not being paid by insurance)
  2. You can also overestimate the value of your home, leading to you spending more money on your home insurance for cover you don’t need. 

Making sure your reconstruction cost estimate and your dwelling coverage amount are the same is a crucial part of paying the right amount for your home insurance. 

What’s the Difference Between Actual Cash Value and Replacement Cost?

The main difference between the actual cash value and the replacement cost is the actual cash value includes the property value along with the home, whereas the replacement cost only focuses on the physical building. 

Actual Cash Value Explained

The actual cash value of your home is what your home is worth at its current appraised value.

Replacement Cost Explained

The replacement cost of your home is the amount of money it would take to rebuild your home. This price includes building your home to be exactly the way it was before a natural disaster or a fire destroyed it. 


Why does homeowner’s insurance increase every year?

Reconstruction costs are rising for a variety of reasons:

  • Construction employees are demanding more pay
  • The cost of building materials is increasing.
  • Finally, tariff and trade wars have also increased the price of lumber, making the whole process more expensive.

Because reconstruction costs are increasing, so are homeowner’s insurance costs. The expenses are trickling all the way down to homeowners.

What are 4 things that affect the cost of home insurance?

There are many factors that go into the cost of home insurance. Here are four to name a few:

  • The more vintage your house is, the more expensive it will be to fix for your insurance. Building materials from the past might be harder to find than newer materials. Home insurance policies also typically view older homes as higher risk, because of issues including outdated plumbing or electrical systems. 
  • If you live in a state that has a good history of natural disasters, then your cost of home insurance will be higher than it would be for the same sized house in a different state with much less chance of natural disasters. 
  • If your home has multiple safety features, such as automatically calling emergency services when an alarm goes off, your home insurance policy could offer a discount for having these services. 
  • The more money your home costs to rebuild the higher your home insurance cost will be. 

What is a reconstruction cost estimate?

The value of your home to be completely rebuilt from scratch is your reconstruction cost estimate (RCE). Your insurance company takes a look at multiple factors before determining the RCE for your home, for example: 

  • Square footage
  • Year built
  • Building materials
  • Labor costs
  • Number of stories

Your reconstruction cost estimate includes the value of only your physical home, not the property itself, or surrounding structures, such as sheds. 

What are 3 ways to lower your home insurance premium?

Here are three ways to lower your home insurance premium:

  1. Add more safety features to your home
  2. Bundle your home and auto insurance 
  3. Build your credit score

Is rebuild cost more than market value?

No. The rebuild cost is less than market value because it doesn’t include the land the house is built on. The rebuild cost focuses only on the physical structure of the home, as well as extensions such as a deck or garage. The market value of a home focuses on the physical structure of the home, as well as surrounding features, such as sheds, pool cabins, and the property itself. 

Finding the right homeowner’s insurance can save you from financial ruin if your home is destroyed. One key way to make sure you have the coverage you need, while not paying too much for it, is to compare insurance companies and the packages they offer.